These Correlations are not permanent, FX Bootcamp update the matrix as necessary.
Using Currency Correlation to Your Advantage
Say, for example, that you’ve located some data on currency correlation coefficients based on the last 100 trading days, and determined the following:
•The GBP/USD moved the same as the EUR/USD 97% of the time
•The USD/CHF move the opposite direction of the EUR/USD 99% of the time
Armed with this kind of information, you can avoid entering two different positions that would likely cancel each other out. By knowing that EUR/USD and USD/CHF move in opposite directions roughly 99% of the time, you would conclude that having an open long trade in EUR/USD, while also being in a long USD/CHF trade, is the same as having virtually no position at all. The two trades would effectively cancel each other out, due to the negative correlation exhibited by these two pairs. In other words, when your long EUR/USD moves up in price, your USD/CHF long will be going down by nearly the same amount, resulting in a pretty pointless trade at double the spread cost. Instead, the savvy trader, understanding this negative correlation, would enter both a long EUR/USD position and a short USD/CHF position—basically, shorting the USD in two different trades.
See EUR/USD; S&P 500 & DOW chart below, really a strong positive correlation!
Inter-market correlations
Inter-market Correlation Matrix
Chart Key:
S&P 500 = September 2010 S&P 500 Index e-mini contract
10yr T-note = December 2010 10-year U.S. T-note contract
Gold = December 2010 Comex Gold contract
Oil = October 2010 Light Sweet Crude Oil contract
- strong positive correlation
- moderate positive correlation
- negligible correlation
- moderate negative correlation
- strong negative correlation
The correlation matrix shown above is based on correlation coefficients derived from 15-minute chart closing prices on GFT’s DealBook 360 platform, from August 2 through 31, 2010.
Currency Correlation Matrix
Chart Key:
- strong positive correlation - moderate positive correlation - negligible correlation - moderate negative correlation - strong negative correlation
The correlation matrix shown above is based on correlation coefficients derived from 15-minute chart closing prices on GFT’s DealBook 360 platform, from August 2 through 31, 2010.
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