ForexEzy
No Result
View All Result
  • Home
  • Forex Education
    • Forex Basics
    • Forex Trading Strategies
    • Money Management
    • Risk Management
    • Technical Analysis
    • Fundamental Analysis
    • Trading Psychology
    • Social Trading
    • Automated Trading
  • Forex Tools
    • Forex Robots
    • Forex Indicators
    • Forex Signals
  • Top Forex Brokers
  • Top Forex Robots
  • Commentary
  • Blog
  • Home
  • Forex Education
    • Forex Basics
    • Forex Trading Strategies
    • Money Management
    • Risk Management
    • Technical Analysis
    • Fundamental Analysis
    • Trading Psychology
    • Social Trading
    • Automated Trading
  • Forex Tools
    • Forex Robots
    • Forex Indicators
    • Forex Signals
  • Top Forex Brokers
  • Top Forex Robots
  • Commentary
  • Blog
No Result
View All Result
ForexEzy
No Result
View All Result
Home Forex Education Forex Basics

How to Choose Forex Trading Correlations

by Richard Brase
August 7, 2020
in Forex Basics
0
How to Choose Forex Trading Correlations
1
SHARES
11
VIEWS
Share on FacebookShare on Twitter

One must keep in mind that global trade consists of many aspects, all of which are intertwined. Participants in each of the global markets are trying to profit while hedging at the same time. That causes correlations -the relationship between the price movements of currency pairs and other markets.

From a statistical perspective, correlations happen when two variables behave in a manner that suggests interdependence. Primarily, forex trading is about forecasting and explaining price movements of currency pairs. But one needs pointers to make successful forecasting. Correlations happen to be one of the most crucial pointers.

A popular correlation for your consideration is between the gold price and the U.S. dollar value. The world over, the U.S. dollar is the primary currency for pricing and trading gold. However, strengthening often predicts a falling gold price. Although this inverse relationship is not always true, it is persistent and stable most of the time. 

Gold Prices and U.S. Dollar Correlation - 5 Year Chart
Figure 1: Gold Prices and U.S. Dollar Correlation – 5 Year Chart

Think You’ve Found One? Here are The Questions to Ask Yourself To Check Founded Correlations

The forex market is huge, and traders encounter a deluge of market data they use to find correlations. But the great amount of data is likely to lead to spurious correlations if not carefully analyzed. Before you convince yourself that what you have is a correlation worthy of trading, make sure you have answers to the following questions:

  1. Are you sure it is no coincidence? An argument you will often see here is that not all correlations seem to be. Faced with huge amounts of market data, your eyes can sometimes pick out spurious correlations. Simply because the value of the U.S. dollar rises at the same time as the consumption of mozzarella cheese does not imply a correlation. There could be other factors at play that are entirely unrelated.
  2. Is there a third variable influencing the apparent correlation of your variables? Again, this is to ask you to confirm whether the correlation is simply a coincidence or not. This argument aside, there could be some correlations that might seem illogical but are explainable. It is the time that you need to look out for a third variable. Here, we accept that there is no causation between the target variables, but something else is at play.

Could you explain why deaths by drowning in the U.S. correlate with ice cream sales? Supposedly, this is a spurious correlation. But digging deeper uncovers a third variable that brings about this relationship, and it is temperature. High temperatures lead to more people going out, especially to beaches. At the same time, more people tend to buy ice cream because of the scorching temperature. Therefore, you are not entirely spurious for infer higher ice cream sales from increased deaths by drowning. 

  1. Is the correlation sustainable? Serious forex traders know that the future is quite as important as the past in terms of correlations. While correlations exist, they are often unstable and fleeting. This aspect of trading correlations is critical, especially if you tend to hold long positions. Sustainability is reliability, which implies higher chances of earning a good profit from your trading activities. Some correlations might exist for days and then become useless.
  2. Can you explain the correlation logically? The world of data could be weird sometimes. Yes, the price of a particular asset might be mirroring the behavior of a certain event, but the question is, does the relationship make an econometric sense? The R2 of the correlation between the number of drivers killed in collision with railway trains in the U.S. and the barrels of crude oil imports by the U.S. from Norway is 99.99%, but is it logical? Therefore, a trader who wants to trade correlations successfully will always want to be sure that there is an actual connection between the price movements in question before confirmation. 

Spurious correlations

We have spoken about spurious correlations a lot in the paragraphs above, and you might be wondering what these are. In the simplest sense, spurious correlations are illogical relationships between two variables. It means you can find almost 100% statistical interdependence between the variables, but no actual relationship exists. And there are many.

Consider this example. The U.S. recorded a falling number of fishing boat deaths between 1999 and 2010. In 1999, almost 20 people died after falling out of a fishing boat compared to under two people in 2010. At the same time, Kentucky had been witnessing the rate of marriages fall. Quite interestingly, the charts of these two events are almost identical, which suggests a significant statistical relationship, as shown in the figure below.  

Spurious correlations

Another example is what we have already covered i.e., the relationship between crude oil imports from Norway and the number of drivers who died by colliding with railway trains. As it is apparent in the figure below, the charts are almost identical!

Spurious correlations

The bottom line

Trading correlations is a significant part of many forex trading strategies today. Many investors acknowledge that the global financial markets and other markets are intertwined. As such, a careful analysis of happenings in one market today could give you a good idea of what could happen in another market. But as market data continues to pile, many correlations seem to pop up, and some spurious. Since spurious correlations are likely to mislead you, you had better confirm the substance in any correlation you uncover.

Share1Tweet
Previous Post

Trading Journal Essentials

Next Post

What is Day Trading Routine of a Forex Trader

Related Posts

Easy Day Trading Strategies for Beginners

Easy Day Trading Strategies for Beginners

by Tim Baudin
April 7, 2021
0

Day trading is the art of executing your trades and closing them within 24 hours. The people who perform this...

Pros and Cons of Market Execution and Pending Orders in Forex

Pros and Cons of Market Execution and Pending Orders in Forex

by Chintan Patel
March 31, 2021
0

Not all orders in forex are made equal; traders have the option of placing an order that will immediately fill...

5 Lessons We Can Learn From ‘The Market Wizards’ book series: Part 2

5 Lessons We Can Learn From ‘The Market Wizards’ book series: Part 2

by Tim Baudin
March 5, 2021
0

This article is a continuation of the five lessons we can learn from ‘The Market Wizards’ book series, one of...

5 Lessons We Can Learn From ‘The Market Wizards’ Series: Part 1

5 Lessons We Can Learn From ‘The Market Wizards’ Series: Part 1

by Chintan Patel
February 19, 2021
0

Have you ever heard about the ‘Market Wizards’ series by Jack Schwager? These trading books are among the best-selling in...

Forex Trader Toolkit for Pros

Forex Trader Toolkit for Pros

by Chintan Patel
December 31, 2020
0

Using proper tools can significantly increase your profitability. The great thing about trading Forex and CFDs is that the majority...

Load More

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Best Forex EA

  • ROFX 9/10
  • Forex Fury 8/10
  • FXgoodway 7.5/10
  • Z Trader FX EA 7/10
  • Forex Incontrol Reborn 6.5/10

Popular News

  • The Best RSI and CCI Combination Trading Strategy for Optimum Returns

    The Best RSI and CCI Combination Trading Strategy for Optimum Returns

    2 shares
    Share 2 Tweet 0
  • Rofx Review – High Profitability and Stable Performance Analysis

    29 shares
    Share 29 Tweet 0
  • The Best Forex Scalping Strategy – Using 3 Popular Technical Indicators

    0 shares
    Share 0 Tweet 0
  • The Best MT4 Indicators & Expert Advisors For Forex Trading

    2 shares
    Share 2 Tweet 0
  • How to check if the indicator is repainting?

    2 shares
    Share 2 Tweet 0

Trading

Footer

We are dedicated to demystify the world of forex trading for you – no matter what level you are on.

Categories
  • Automated Trading
  • Day Trading
  • Forex Basics
  • Forex Brokers
  • Forex Education
  • Forex Forecasts
  • Forex Indicators
  • Forex Market Commentary
  • Forex Robots
  • Forex Signals
  • Forex Tools
  • Forex Trading Strategies
  • Fundamental Analysis
  • Money Management
  • News
  • Risk Management
  • Social Trading
  • Technical Analysis
  • Top World Traders
  • Trading Psychology
  • Uncategorized
Tags
arbitrage atr bollinger bands cci chart patterns classics copy trading courses day trading forex brokers forex charts forex ea forex education forex forecasting Forex Indicators forex software reviews grid trading hedging ichimoku macd market cycles news trading oscillators price action trading rsi social trading strategies tips & tricks trading bots trading platforms trend trading Video
  • Terms of Use
  • Privacy Policy
  • Compensation Disclosure
  • Risk Disclosure
  • About Us
  • Contact Us

Copyright © 2021 by ForexEzy.com

No Result
View All Result
  • Home
  • Forex Education
    • Forex Basics
    • Forex Trading Strategies
    • Money Management
    • Risk Management
    • Technical Analysis
    • Fundamental Analysis
    • Trading Psychology
    • Social Trading
    • Automated Trading
  • Forex Tools
    • Forex Robots
    • Forex Indicators
    • Forex Signals
  • Top Forex Brokers
  • Top Forex Robots
  • Commentary
  • Blog

© 2021, Forexezy.