Why Understanding Forex Pair Correlations Is Important

A forex correlation is how one currency pair moves in relation to another. Some pairs move in a very similar way, others move in opposite directions and other pairs may have no relation to each other at all. If you take multiple currency positions at one time, knowing how your pairs act in relation to one another is key to understanding your real risk and profit potential. It is possible that you are taking on much more risk than you think (if multiple positions are positively correlated) or that any gains in one pair will be erased by a loss in the other (negatively correlated positions).

Forex correlation stats may seem daunting, but a basic understanding of correlations can go a long way toward helping you to become a better trader. 

What is a Forex Correlation?

A correlation is a measure of how much one currency moves with another. Correlations run between -100 and +100, with the former meaning they move in opposite directions to one another, and the latter meaning they move in the same direction.

The number between -100 and +100 shows the strength of the relationship. -100 shows two different pairs always move inversely to each other over the period being tested. On the Daily Forex Stats page you will find various resources (or links to resources) where you can test correlations over varying lengths of time and different time frames (such as hourly, daily or weekly data). A reading of +80 shows there is a very strong correlation between two currency pairs–they move in the same direction very often, but not all the time.

A +100 correlation means two pairs move in the same direction. A -100 correlation means the pairs move in opposite directions. A correlation of 0 (zero) or a small positive or negative number (such as -30 or +25) means the pairs have no real correlation and if they do move together it is more likely to be random than anything significant.  Typically a correlation of -/+ 70 is significant and noteworthy, while -/+ 80 is a strong correlation (or strong inverse correlation if negative).