As we know, in our forex currency trading in pairs (couples). Price between one pair and another pair, especially currency pairs with the same components, of course, has a correlation (relationship) are relatively close to one another. For example: the pair EUR / USD would have a relationship with the pair GBP / USD. Similarly, GBP / USD pair associated with the GBP / JPY.
Understanding the correlation (relationship) between the 2 pairs we can utilize for some things, for example to support the analysis or we can also be an alternative to hedge against a position in a pair with another pair using the "brothers". Correlation values generally range between -1 and 1 correlation of -1 means the two pairs have a perfect negative relationship. This means that the pair moves to the opposite direction always. If one of them goes up, it will only go down. Correlation of 1 means the two pairs have a perfect positive relationship. This means that the pair moves with the direction is always the same.
If one pair goes up, the other pair will also rise. The correlation is positive but less than 1 means the two pairs are likely (depending on the value of the correlation) move in the same direction, whereas a negative correlation> -1 means that the two pairs are likely (depending on the value of the correlation) moves in the opposite direction. Many trader friend who used to do trade in pairs that have a strong correlation, either positive or negative correlation. It is actually to facilitate the observation and analysis and decision buy / sell in the end.
Pair most often in trade-the unison is EUR / USD and GBP / USD. Both of these pairs have a positive correlation and relatively high. The tendency when the pair EUR / USD moves up, the pair GBP / USD is also moving up. Due to the nature of the relatively high correlation of this, many traders who trade both these pairs simultaneously.
Generally they take the same position in both these pairs. For example, buy in EUR / USD and buy in GBP / USD. Pair "brothers" who have such a high correlation can be used as well if we want to do hedging, but not in the same pair. Understanding of the correlation between the two pairs in different time periods can also be used as a benchmark for decision-position Buy / Sell.
The analogy is as follows: the slow speed of a car because of a traffic jam on the freeway does not necessarily indicate that the average speed of each car will be the same. Correlation between the pair typically are dynamic and change over time. We can observe the correlation of the past few days and compare it with the correlation value in the long term, say a period of one year. If the short-term value is far different from the long-term value, it may mean an opportunity to take a position.
Say that the pair A and B have a correlation value of 0.98 during the year. This means that both pairs move in the same direction, when the pair A moves up, the pair B also moves at the same speed. Well, if we see that in one month or one week is the correlation value of the currency pair A and B dropped to 0.10, which means moving in the same direction but at different speeds. So what do we do? Look at where the pair are slow and do buy.
The picture, say two cars moving towards the same goal, one moving at 100 km / h and the other at 10 mi / h and we mengassumsikan that in the end both will probably reach the speed (same speed), then we will be "up" cars slower and take advantage of the movement "chase" cars that had preceded. Trading with the basic dynamics of the two-pair correlation as above it takes patience its own anyway. Well, but at least it could be an alternative basis of our decision in Air-trading.
Similarly, the article on Understanding And Utilizing Correlation Between 2 Pairs
