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One Response to “How to use currency correlation?”
Currency correlation tells you if the two currency pairs are moving in same direction or opposite direction and how strong is that the correlation between those pairs. If two pairs move in the same direction very strongly then you should be avoiding taking a long (buy) position for one pair and simultaneously short (selling) position for the other pair and vice versa. This is the first use.
Second use is that it is possible that the long term average correlation is quite strong. For example 2 pairs generally move in the same direction quite strongly. At times you may notice that suddenly that correlation has changed drastically. May be one pair is moving up very fast but not the second. Considering the longer term history you may like to buy the second pair because it may catch up with the first or the opposite i.e. short-sell the first.
How often does it change: Well, the forex market is a volatile market and the correlation may keep changing every minute but you may find that on an average the picture remains similar. You may like to see the changing correlations at one of the websites mentioned in the resource box below this answer.
a) Decide on the time frame for which you wish to calculate correlation. It can be hourly, daily, weekly or whatever you wish.
b) Get the closing prices for those time frame. You may have to decide how many periods i.e. hours or days or weeks etc you wish to select.
c) Easiest way to calculate is to use some online correlation calculators like on http://www.forexabode.com/trading-tools/currency-correlation
d) In case you wish to make your own Excel calculator then you can have two colums in an Excel sheet. One column for the prices of one currency pair, and second column for another pair.
e) Now in any blank cell in the sheet (may be below these columns, you can wite the formula =CORREL(
f) Now select all the data from the coumn of the first pair. Suppose your data is in the A coumn from cell number A1 to A20 then you will get =CORREL(A1:A20. Put a comma after that i.e. =CORREL(A1:A20,
g) select all the data from the column for the second currency pair. If it is column B then you will get =CORREL(A1:A20,B1:B20. Close the bracket i.e. =CORREL(A1:A20,B1:B20) and press ENTER.
You will get the correlation value for these selected corresponding prices for those two currency pairs.
January 22nd, 2012 at 5:41 pm
Currency correlation tells you if the two currency pairs are moving in same direction or opposite direction and how strong is that the correlation between those pairs. If two pairs move in the same direction very strongly then you should be avoiding taking a long (buy) position for one pair and simultaneously short (selling) position for the other pair and vice versa. This is the first use.
Second use is that it is possible that the long term average correlation is quite strong. For example 2 pairs generally move in the same direction quite strongly. At times you may notice that suddenly that correlation has changed drastically. May be one pair is moving up very fast but not the second. Considering the longer term history you may like to buy the second pair because it may catch up with the first or the opposite i.e. short-sell the first.
How often does it change: Well, the forex market is a volatile market and the correlation may keep changing every minute but you may find that on an average the picture remains similar. You may like to see the changing correlations at one of the websites mentioned in the resource box below this answer.
a) Decide on the time frame for which you wish to calculate correlation. It can be hourly, daily, weekly or whatever you wish.
b) Get the closing prices for those time frame. You may have to decide how many periods i.e. hours or days or weeks etc you wish to select.
c) Easiest way to calculate is to use some online correlation calculators like on http://www.forexabode.com/trading-tools/currency-correlation
d) In case you wish to make your own Excel calculator then you can have two colums in an Excel sheet. One column for the prices of one currency pair, and second column for another pair.
e) Now in any blank cell in the sheet (may be below these columns, you can wite the formula =CORREL(
f) Now select all the data from the coumn of the first pair. Suppose your data is in the A coumn from cell number A1 to A20 then you will get =CORREL(A1:A20. Put a comma after that i.e. =CORREL(A1:A20,
g) select all the data from the column for the second currency pair. If it is column B then you will get =CORREL(A1:A20,B1:B20. Close the bracket i.e. =CORREL(A1:A20,B1:B20) and press ENTER.
You will get the correlation value for these selected corresponding prices for those two currency pairs.