Learn the techniques on how to use market correlation. This will give you a hidden edge over your fellow traders in the market. This is critical for those who are looking for a strong understanding of market direction.
Understanding Market Correlation
When the price of two or more different pairs moves together we are talking about market correlation. Note that in forex the price of different pairs can move up on both, but that it can also be reversed. This means that when one moves up, the other consistently moves down. We talk about market correlation in both cases.
Correlations are dynamic, they will always change over time. They can actually vary very much over different time periods. And even the correlation on for instance the 4h chart may vary a lot from the correlation on the 15min or weekly chart.
Market Correlation doesn't Matter If Your Technical Analysis Is Not Up To Par
Market Correlation doesn't move the forex markets. A confluence of other factors move the market - most notably central bank policy. So if you see correlation among a few pairs or a whole currency group, you have a great tool to determine the direction. With this in mind you can use your technical analysis skills to assess which pair is the best to trade in that direction. However, if you lack the technical analysis skills, then knowing market direction is not very useful at all. For instance, you can be aware of the direction, but if you don't read the market well enough to determine the timing and stops of your trade, there's a good chance you will get stopped out. And getting stopped out and later seeing the trade move in the direction you predicted is a major painful thing to see for any trader.
So as always with trading tools, make sure your read of the story is good and before that; get your basics cemented.
Watch the video at the top for the full lesson so you can continue to enhance your skills and be better everyday.
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Editors’ Picks
EUR/USD trims gains, nears 1.1700
The EUR/USD pair eases in the American afternoon and approaches the 1.1700 mark. The pair surged earlier in the day after the ECB left interest rates unchanged and upwardly revised inflation and growth figures. The US CPI rose 2.7% YoY in November, nearing Fed’s goal.
GBP/USD returns to 1.3370 after BoE, US CPI
The GBP/USD pair jumped towards the 1.3440 early in the day, following the BoE decision to cut rates, and US CPI data, which was much softer than anticipated. The US Dollar, however, managed to regain the ground lost during US trading hours.
USD/JPY rises to near 156.00 ahead of US CPI data, BoJ policy decision
USD/JPY moves higher to near 156.00 in the countdown to the US inflation data. Fed’s Bostic sees inflation more worrying than the job market. The BoJ is expected to raise interest rates by 25 bps to 0.75% on Friday.
Editors’ Picks
EUR/USD trims gains, nears 1.1700
The EUR/USD pair eases in the American afternoon and approaches the 1.1700 mark. The pair surged earlier in the day after the ECB left interest rates unchanged and upwardly revised inflation and growth figures. The US CPI rose 2.7% YoY in November, nearing Fed’s goal.
GBP/USD returns to 1.3370 after BoE, US CPI
The GBP/USD pair jumped towards the 1.3440 early in the day, following the BoE decision to cut rates, and US CPI data, which was much softer than anticipated. The US Dollar, however, managed to regain the ground lost during US trading hours.
Gold extends its consolidative phase around $4,330
The bright metal cannot attract speculative interest on Thursday, despite central banks announcements and the United States latest inflation update. XAU/USD is stuck around $4,330, confined to a tight intraday range.
Crypto Today: Bitcoin, Ethereum hold steady while XRP slides amid mixed ETF flows
Bitcoin eyes short-term breakout above $87,000, underpinned by a significant increase in ETF inflows. Ethereum defends support around $2,800 as mild ETF outflows suppress its recovery. XRP holds above at $1.82 amid bearish technical signals and persistent inflows into ETFs.
Bank of England cuts rates in heavily divided decision
The Bank of England has cut rates to 3.75%, but the decision was more hawkish than expected, leaving market rates higher and sterling slightly stronger. It's a close call whether the Bank cuts again in February or March.
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