Included with the latest release of NinjaTrader 8, the FX Correlation window is a powerful new tool used to detect and display correlation between multiple forex instruments at once.
Since FX instruments are priced in pairs, no single forex pair behaves independently. Simply put, FX pairs are interdependent and therefore correlated to one another. Detecting this correlation is an insightful way to view the dynamic interplay of forex markets and identify trading opportunities.
The FX Correlation window helps forex traders identify correlated currency pairs heading in the same or opposite directions.
How Does FX Correlation Work?
The FX Correlation tool displays correlation coefficients in a grid format with values close to +1 indicating positive correlations and values close to -1 indicating negative correlations. A positive correlation means the two instruments are moving in the same direction, and a negative correlation means they are moving in opposite directions. The Range drop-down menu is used to select the period of time used in the calculation.
Positive correlations help traders predicts which currency pairs are more likely to move in tandem with one another, while negative correlations help determine which pairs are likely to move apart. The closer to +1 or -1, the stronger the correlation.
- 1 suggests that two FX pairs will move in the same direction 100% of the time.
- -1 implies that the two pairs will move in opposite directions 100% of the time.
- 0 indicates no correlation at all between the two currency pairs.
In the FX Correlation grid above, a strong negative correlation is seen between the GBPUSD and EURGBP pairs. This negative correlation can be confirmed in the 2-paneled chart below in which the two FX pairs move in almost symmetrically opposite directions.
Whether you are an experienced forex trader or are just getting started, identifying correlation between various currency pairs can help track trends and market moves. This important information can also help to diversify an FX portfolio, hedge a position or strengthen a trade thesis.
Trading unpredictable forex markets involves financial risk and traders should employ appropriate risk management techniques such as stop loss orders.
Get the FX Correlation Tool
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