Currency Comparison: Quickly Finding Correlations for Forex Trading

Tad DeVan is a Senior Forex Analyst for Market Traders Institute and host of the Ignite Trading Room. Ignite Trading Room is FREE to join for active SmartTrader users.   

Many Forex traders use currency comparison to look for potential wins. One of the inner-circle secrets is, you can sometimes find these correlations happening at the same time.

When you see a currency pair that’s making a move with the potential for a win, it’s often smart to look at the latest economic news. This can help tell you which currency in the pair is driving the movement. And that’s the first step to knowing which comparisons to look at.

The best charting platforms will allow you to place an overlay of another instrument on your SmartTrader charts. One of the first things to look at is other pairs that involve the currency driving the movement of your first pair.

For instance: Let’s say USD/JPY is moving, and that news around the U.S. dollar is pushing the movement. You’ll want to do a currency comparison. Go into your chart showing the USD/JPY movement, and overlay other dollar pairs such as USD/CHF, USD/CAD, and so on. You’ll want to assign a different color to each overlay, so you can keep track of which pair is moving in which direction.

Let’s say USD/CHF matches the movement of USD/JPY, but USD/CAD does not. In that case, you could set similar trading setups for both USD/JPY and USD/CHF at the same time, because you expect them to have similar movement in correlation. But in that scenario, you would not expect USD/CAD to align with the other two moving forward, right? Many traders also will check a currency pair against a currency’s index. This strategy can provide clues on whether or not to expect multiple currency pairs to correlate with one pair’s movement.

You don’t need to limit your comparisons within currencies. In some instances, another instrument class might carry a correlation to a currency pair’s movement. For instance, oil is a big driver of the Canadian dollar’s movement. So, to use the above example again, you might overlay oil prices on a USD/CAD chart and see if they are moving similarly.

Tad Devan serves as Senior Currency Strategist at Market Traders Institute. For more of Tad’s Forex strategies and trades, you can check out the Analyst On Demand Trading Room.

Every week, within the trading room, Tad and market veteran Tian Kriek will take you through real market conditions and help teach you the keys to being a smarter trader across the board. Just spend a little time with our pros and we believe you could see great results for yourself. You can access Analyst On Demand by clicking here >>

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before getting involved in foreign exchange you should carefully consider your personal venture objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial deposit and therefore you should not place funds that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The information contained in this web page does not constitute financial advice or a solicitation to buy or sell any Forex contract or securities of any type. MTI will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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