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What is Forex Correlation Trading?

What is Forex Correlation Trading

Forex Correlation Trading is trading on two correlated currency pairs using a special strategy. Typically, such strategies are easy to use and give the user a profit in 90% of trading operations. However, let's consider everything in order. Let's start with what Forex correlation is.

What is Forex Correlation?

Forex Correlation indicates the relationship between the movements of two different currency pairs. This correlation can be positive or negative.

  • A positive correlation means that the two currency pairs move in the same direction.

For example, there is a positive correlation between AUDUSD and NZDUSD. As you can see, the movement dynamics of these two currency pairs are very similar to each other. The quotes move in the same direction with some minor differences.

  • A negative correlation means that the two currency pairs move in opposite directions.

For example, there is a negative correlation between EURUSD and USDCHF. As you can see, the quotes of these two currency pairs move in mirror directions with some minor differences.

forex pair correlation USDCHF

How to Trade on Correlation?

What happens if you make two trades in opposite directions on two currency pairs with a positive correlation?

For instance,

  • AUDUSD - BUY
  • NZDUSD - SELL

As noted above, the quotes of these two currency pairs move in the same direction. Consequently, a trade on one currency pair will bring you profit, while on the other currency pair, you will incur a loss.

Now, let's overlay the quotes of these two currency pairs on the same plane. We now see time intervals where the quotes of AUDUSD and NZDUSD diverge in different directions and then converge back:

What if you make a Sell trade on the currency pair whose quotes are above and a Buy trade on the currency pair whose quotes are below? In this case, at the moment of the quotes converging on the same plane, the trader will make a profit!

We have described to you the simplest example of trading on correlation. This example became the foundation for us to create a professional trading system.

Which Currency Pairs Can Be Traded on Correlation?

Forex correlation pairs list

There is a vast number of currency pairs whose quote movements you can compare to find moments of divergence and convergence. That is, to make counter-directional trades at the maximum divergence and to lock in profits at the moment of convergence. According to statistics, 90% of these trades will be profitable for you! So, here is a list of currency pairs on which you can trade based on correlation:

Positive correlated forex pairs list (correlation value from 0.6 to 0.9):
  • EURUSD – EURJPY, GBPUSD, AUDUSD, NZDUSD, GBPCAD, GBPJPY, EURCAD, AUDJPY
  • GBPUSD – AUDUSD, GBPAUD, NZDUSD, GBPJPY, EURUSD, GBPCAD, GBPCHF, GBPNZD 
  • EURJPY – EURUSD, AUDJPY, GBPJPY, CHFJPY, CADJPY, NZDJPY, EURCAD, EURAUD, EURNZD
  • GBPJPY – GBPUSD, EURJPY, GBPCAD, GBPAUD, GBPCAD, AUDJPY, CADJPY, NZDJPY, CHFJPY
  • EURCAD – EURUSD, EURAUD, EURJPY, GBPCAD, AUDCAD, NZDCAD
  • GBPCAD – GBPUSD, GBPAUD, GBPCHF, GBPNZD, EURCAD, GBPJPY, EURCAD, AUDCAD
  • AUDJPY – AUDUSD, AUDCAD, AUDCHF, CADJPY, NZDJPY
  • NZDCAD – NZDJPY, NZDUSD, NZDCHF,
  • AUDCAD – AUDCHF, GBPCAD, EURCAD, AUDJPY
  • AUDUSD – EURUSD, GBPUSD, AUDJPY, AUDCAD, AUDCHF
  • CHFJPY – EURJPY
  • EURGBP – EURCHF, EURUSD
  • NZDJPY – NZDCAD, NZDUSD
  • NZDUSD – NZDJPY
  • EURNZD – EURGBP, AUDNZD, GBPNZD
  • GBPNZD – EURNZD
  • AUDNZD – AUDCAD, NZDCAD, AUDUSD, NZDUSD
  • NZDCHF – GBPCHF, AUDCHF
  • EURCHF – GBPCHF
  • GBPCHF – EURCHF, AUDCHF, NZDCHF, CADCHF
  • USDCHF – CADCHF
  • AUDCHF – GBPCHF, NZDCHF
  • CADCHF – USDCHF

As you can see, for each currency pair you can select another currency pair with a high degree of correlation. In simple terms, you can make money from all these correlation combinations. That is, overlay quote charts on top of each other on the same plane and make multidirectional transactions at the moment of maximum divergence in quotes. As you understand, it is necessary to take profit when the quotes of currency pairs collapse back into each other.

However, take your time, there is a large set of negatively correlated currency pairs. As we noted above, the quotes of such currency pairs move as if in a mirror image. When trading on a negative correlation, trades must be made in one direction.

Negative forex correlation pairs list:
  • EURUSD USDCHF, USDCAD
  • EURCAD– CADCHF, CADJPY,
  • EURNZD– NZDCHF, NZDCAD, NZDJPY, NZDUSD
  • CHFJPY– USDCHF, CADCHF, AUDCHF, NZDCHF
  • GBPNZD– NZDCHF, NZDCAD, NZDJPY, NZDUSD
  • NZDCHF– EURNZD, GBPNZD
  • CADCHF– GBPCAD, CHFJPY, EURCAD