Ticker tape by TradingView

Want Trade Alerts?

See all of our entries, exits, and analysis. 
Use code READER for 25% OFF!
Join VIP

June 15, 2020

The Importance Of Market Correlations

Frank Cabibi

We now live in a world where everything is connected. Communication, businesses and even markets rely and react to each other on a daily basis, and little to none behave on their own. Global markets are probably the most intertwined entities in the world. You can watch as multiple pairs move with each other on good or bad news.

How to Spot Correlation

There is a tool that traders can use called the correlation coefficient which measures how correlated the behavior of a pair is to another source. For example, if you wanted to know the correlation between GBP/USD and Bitcoin, you can set the filter to compare them.

AUD/USD in correlation to GBP/USD

The chart above is showing the differences in correlation between the pairs AUD/USD and GBP/USD. The correlation coefficient underneath the price shows a chart from -1 to +1. -1 would be a perfect negative correlation, meaning that whenever the price of one pair goes up, the price of the other is going down. A +1 correlation means that the prices of both pairs behave the same way. A value of 0 means that there is no correlation between the two pairs. On this chart above, GU and AU are strongly correlated. A perfect correlation is not common, in fact it almost never happens. But here, you can come to the conclusion that for the most part, the two pairs will move in the same direction. There were a few short lengths of time where the correlation was not there and one time in December of 2019 where the correlation was a strong negative. Within this month, GU and AU have a nearly-perfect correlation. This doesn't mean the charts will look the same, but when AU moves in one direction, GU follows and vice versa.

Why Are Correlations Important?

Usually in times of market crashes, stocks and currencies move in unison. It's the same case during the recovery phase as well. According to Investopedia, the S&P 500 and crude oil were at a 97% positive correlation in January 2016. In times of great volatility, most stocks/currencies will move in positive correlations. This is important to note because once you've realized correlation between lots of different companies regardless of what sector they're in, you can adjust your bets and try to diversify. You probably don't want every stock/currency you own to move together in the same direction. You want diversification and options. If one trade is affected, you don't want the trades your investing in to also be affected in the same way. That's why some investors move their money trading between the US stock market and precious metals. There are strong positive and negative correlations between the two. In all, low correlation means less risk, and risk management is essential to trading.

Featured Photo: https://www.quora.com/Is-the-Crypto-Price-correlation-the-result-of-FOMO-or-market-manipulation


Thanks for reading! If you are interested in joining our trading community, we have chat rooms, trade alerts from our top traders, and educational content. You can join using the link below, and get a discount on your membership.

Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

Looking for Trade alerts?

Our entries, exits & analysis
Live Webinar Coaching
Trading Chatrooms
Strategy Library 
Use Code "READER" for $5 OFF!
JOIN NOW

free trading help

Looking for trading help? Submit your question here!
GET FREE TRADING HELP
Need a Forex Broker Upgrade?
Take our broker quiz and find out your best broker match!
FIND A BROKER
Bitcoin About To Catch Big Upside

Bitcoin has been vastly oversold due to the fact of regulation concerns from the US government wanting to make a more controlled market just like stocks. For over 2 months, the crypto has fallen nearly 42% from the highs in November, but it looks like it has found a bottom in the $39Ks. Why Bitcoin […]

Read More
CPI Climbs 7%, USD Could Be Bearish Now

CPI numbers came in yesterday indicating a 7% climb in inflation from last month. This is some bad news for the Fed, USD, and stock market which could lead to a short term bearish trend until the Fed raises rates. This report should be bullish for the USD in the longer term since investors can […]

Read More
How to Tell When a Forex Trend is Ending: 3 Clues!

Trend trading is perhaps one of the most commonly used strategies in the forex world. In this article we will be sharing tips on how to determine the end of one forex trend and the potential start of a new one. We will share 3 specific clues that you should be looking for when trend […]

Read More
DISCLAIMER: All comments made by TraderNick’s Forex Group, LLC are for educational and informational purposes only. All comments should not be construed as investment advice regarding the purchase or sale of any securities or financial instrument of any kind. Please consult with your financial adviser before making an investment decision regarding any securities or financial instruments mentioned by TraderNick’s Forex Group, LLC. TraderNick’s Forex Group, LLC assumes no responsibility for your trading and investment results. All information on any of the platforms utilized by TraderNick’s Forex Group, LLC was obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. TraderNick’s Forex Group, LLC, its employees, representatives, and affiliated individuals may have a position or effect transactions in the securities and financial instruments herein and or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading of any type involves very high risk and may not be suitable for all investors. TraderNick’s Forex Group, LLC, its subsidiaries and all affiliated individuals assume no responsibility for your trading and investment result. Read our full disclaimer here
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram