Correlation is one of the ways of working on Forex
Any currencies are valued in pairs. And this is not surprising, because it is obvious that there are no independent currencies, as there are no independent currency pairs. Any impact on the market to some extent affects all participants in market relations.
Correlation is the dependence of one quantity on another. Knowing the correlation coefficient, you can easily predict the movement of the currency pair (depending on the movement of the other).So, for example, consider two currency pairs "A" and"B", which are in a certain direct dependence on each other. This means that the correlation function can show how much the first pair will grow in price (in the case of an increase in the price of the second). With reverse dependence, the opposite is true: it becomes known how much the currency pair will fall in price (depending on the increase in the price of the second pair).
By calculating the value of the correlation functionit is possible to easily predict the future values of the price when trading based on data on the remaining currency pairs for which no trades occur. In such cases, the main task is the correct calculation of the correlation coefficient.
Correlation is a reliable assistant in trading on the Forex market. With its help, you can easily control the risks.
To successfully use this knowledge in practice, you need to know certain basics.Correlation is either positive or negativevalue. Positive - when the correlation coefficient is greater than zero and less (or equal to) +1. The closer the value to +1, the greater the probability that the pairs will move in one direction. At a value of the coefficient equal to 0, the motion of the pairs is absolutely not interconnected. Negative correlation - when the correlation coefficient is less than zero and greater (or equal to) -1. The closer the value to -1, the greater the probability that the pairs will move in different directions.
There are several ways to calculate the correlation coefficient. One of the simplest and most effective is Spearman's correlation.
This is a method that allows you to calculatecoefficient of correlation based on statistics. To do this, it is necessary to calculate the degree of actual parallelism, which is calculated between two interconnected series of number-quantities.
The calculation proceeds approximately according to the following plan:
1) Each attribute is assigned its own serial number (in descending order or ascending).
2) Determine the difference in rank for each individual pair of values that are matched.
3) The resulting differences are squared.
4) The resulting differences are added.
5) The correlation coefficient is calculated (according to the known formula).
Knowledge of the process of interaction of currency pairs cangreatly simplify your work in the Forex market. You can also increase your profits, while minimizing risks. All your purchases and sales will be based only on real mathematical and probabilistic calculations.
Now for you, correlation is not easyfoggy term. Such knowledge will allow you to call yourself a trade professional in foreign exchange markets (and not just them!).