Very often currency pairs are closely related to one another – and this is something that can be used to the Forex Traders advantage. Correlation analysis helps you understand these relationships. Positive and negative correlations between currency pairs are measured in decimal form – and they serve to reflect the extent to which the pairs ‘trade in line’ or diverge with eachother.
The closer the number is to 1, the stronger the positive correlation. Conversely – the closer the number is to -1 the stronger the negative correlation. Currency correlations are measured over a specific time periods, and it is important to bear in mind that these relationships reflected in the numbers will change over time.
Correlations can help a forex trader manage their risk exposure – by using a pair with a negative correlation as a hedge. A positive correlation between two currency pairs can be used as a leading indicator.