Use correlation to your advantage

Hi Traders,

Today I want to talk about something that I personally use every trading day which helps me a lot which is correlation.

Before I continue, here is what correlation means:

In the financial world, correlation is a statistical measure of how two securities move in relation to each other. Currency correlation, then, tells us whether two currency pairs move in the same, opposite, or totally random direction, over some period of time. When trading currencies, it’s important to remember that since currencies are traded in pairs, that no single currency pair is ever totally isolated.

By having a correlation to look at and follow, it gives me more support and also a better time entry into my trades. Here are some correlation which I have been watching in the past few days:

EUR/USD + USD/CHF

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GOLD + DXY

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USD/USD + USOIL

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Inversely moving pairs are:

EUR/USD and USD/CHF
GBP/USD and USD/JPY
GBP/USD and USD/CHF
AUD/USD and USD/CAD
AUD/USD and USD/JPY

Examples of same direction moving currency pairs are:

EUR/USD and GBP/USD
EUR/USD and NZD/USD
USD/CHF and USD/JPY
AUD/USD and GBP/USD
AUD/USD and EUR/USD

I will give you an example of when I use correlation on my trading:

If I want to sell EUR/USD; first I will wait for him to touch a resistance level, when he does I will look a 'inversely correlation' to give me another support which in this case will be USD/CHF. So as I want to sell EUR/USD and he just touched a resistance level, I will see if USD/CHF is touching a support level at the same time. If he is, I will short EUR/USD knowing that USD/CHF is at support or if USD/CHF is not at support, I will wait a bit more until he does to finally sell EUR/USD.

This is a very simple technique which can help you a lot by opening trades with a better price point. I recommend you use it when you.

By Thiago Duarte
Chief Strategist at Duarte Investment Group 
thiago@duarteinvestmentgroup.com 
@thiagotrader