Pairs Correlation is a statistical measure of how two securities move in relation to each other.Understanding that correlations exist also allows you to use different currency pairs, but still leverage your point of view. Rather than trading a single currency pair all the time, you can spread your risk across two pairs that move the same way.
Pick pairs that have a strong to very strong correlation (around 0.7). For example, EUR/USD and GBP/USD tend to move together. The imperfect correlation between these two currency pairs gives you the opportunity to diversify which helps reduce your risk. Let’s say you’re bullish on USD.
Instead of opening two short positions of EUR/USD, you could short one EUR/USD and short one GBP/USD which would shield you from some risk and diversify your overall position.
In the event that the U.S. dollar sells off, the euro might be affected to a lesser extent than the pound.
Pick pairs that have a strong to very strong correlation (around 0.7). For example, EUR/USD and GBP/USD tend to move together. The imperfect correlation between these two currency pairs gives you the opportunity to diversify which helps reduce your risk. Let’s say you’re bullish on USD.
Instead of opening two short positions of EUR/USD, you could short one EUR/USD and short one GBP/USD which would shield you from some risk and diversify your overall position.
In the event that the U.S. dollar sells off, the euro might be affected to a lesser extent than the pound.
