Any currencies are valued in pairs. And this is not surprising, because it is obvious that there are no independent currencies, just as there are no independent currency pairs. Any impact on the market to one degree or another affects all participants in market relations.
Correlation - this is the dependence of one quantity on another. Knowing the correlation coefficient, one can easily predict the movement of a currency pair (depending on the movement of another).
So, for example, consider two currency pairs “A” and “B”, which are in a certain direct dependence on each other. This means that the correlation function can show how much the first pair will increase in price (in case the second price increases). With an inverse relationship, the opposite is true: it becomes known how much the currency pair will fall in price (depending on the increase in the price of the second pair).
By calculating the value of the correlation function, you can easily predict the future price values when trading based on data for other currency pairs for which no trading takes place. In such cases, the main task is to correctly calculate the correlation coefficient.
Correlation is a reliable assistant in Forex trading. With it, you can easily control risks.
To successfully use this knowledge in practice, you need to know certain basics.
Correlation is either a positive or a negative value. Positive - when the correlation coefficient is greater than zero and less than (or equal to) +1. The closer the value is to +1, the greater the likelihood that the pairs will move in one direction. When the coefficient value is 0, the movement of the pairs is absolutely not interconnected. Negative correlation - when the correlation coefficient is less than zero and greater than (or equal to) -1. The closer the value is to -1, the greater the likelihood that the pairs will move in different directions.
There are several ways to calculate the correlation coefficient. One of the simplest and most effective is Spearman's correlation.
This is a method that allows you to calculate the correlation coefficient based on statistics. For this, it is necessary to calculate the degree of actual parallelism, which is calculated between two interconnected series of numbers-quantities.
The calculation goes approximately according to the following plan:
1) Each characteristic is assigned its own serial number (descending or ascending).
2) The difference in ranks is determined for each individual pair of values that are compared.
3) The resulting differences are squared.
4) The differences obtained are summarized.
5) The correlation coefficient is calculated (according to the well-known formula).
Knowing the process of interaction between currency pairs can greatly simplify your work in the Forex market. You can also increase your profits, while minimizing risks. All your purchases and sales will be based only on real mathematical and probabilistic calculations.
Now for you, correlation is not just a foggy term. Such knowledge will allow you to call yourself a professional trading in the foreign exchange markets (and not only on them!). And this, you must admit, will not be superfluous!
