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How to predict the price movement of Forex market

The estimation of currency exchange rates is done in pairs, each of which depends on different circumstances. Therefore, it should be considered as a relationship and interdependence of monetary units.

Risk control can only be achieved with the help of all currency-related information.

Assume that currency pair A and currency pair B move in unison. The progress of this currency pair is carefully tracked by traders. If the growth of currency pair A is possible, the trader should open a buy order. The trader has not carefully observed the B currency pair. At this time, technical and fundamental analysis signals indicate the possibility of lowering the price of this group. Then, it is necessary to open an order with reduced (sale) expectations. At the end, the trader will make a profit from the first currency pair traded, but will not make a profit from the second currency pair traded because they have moved in the same direction. If a buying order is established at the same time or a long position in two currency pairs moving in different directions, the result of the transaction will be the same.

Risk control can only be achieved with the help of the relevant information of all currencies, and over time, all changes will occur.

The correlation coefficient ranges from -1 to 1. If the correlation coefficient is equal to 1, it means that currency pair A and currency pair B move in the same direction. Zero correlation means that the relationship of the currency pair has irregular characteristics.

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Types of currency correlation – Positive correlation

When the correlation coefficient is less than 1, it means that the currency pair moves in the same direction. If the value of the coefficient is close to 1, the currency pair moves in the same direction most of the time.

Types of currency correlation – Negative correlation

If the negative value is greater than -1, the currency pair moves in the opposite direction, but not frequently. The value of the coefficients close to -1 means that they move in the opposite direction most of the time.

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How to use currency correlation in foreign exchange transactions

Correlation is a fast, constantly changing phenomenon. Look at the correlation between the correlation coefficient level of the last two days and the important period, for example, a month or a year. When there is a significant difference between short-term and long-term transaction values, an order should be established. But how can it be done? For example, the correlation coefficient between A currency pair and B currency pair last year was 0.98. This means that these two currency pairs move in the same direction almost all the time. When the price of currency pair A increases, the price of currency pair B also increases at the same rate. However, you suddenly find that the correlation coefficient for the past week or month is equal to 0.10, which means that the currency pair has the same direction but a different speed.

What should we do in this situation? Traders can decide which currency pairs move more slowly, and therefore decide when to place an order.

Suppose that currency pair A and currency pair B are moving in the same direction, and the correlation coefficient exceeds 0.60. But at the same time, traders found that the correlation coefficient in the last few days was equal to 0.20. Therefore, the trader knows which currency pair has affected the reduction of the relevant level, and can establish a buy position. In addition, the trader can no longer track this currency pair.