Forex Correlation Table: Are You Doubling Your Risk Without Knowing It?

A Forex correlation table is an essential tool that every Forex trader needs—whether you’re a technical analyst, a fundamental analyst, or someone who combines both approaches. If you’re trading currencies, you need an accurate Forex correlation table to manage your risk properly.

In this article, Finance Solutes will share a correlation table of popular currency pairs. We’ll also explain how you may have been doubling your risk without even knowing it—and what you can do to fix that.

1. WHY IS CORRELATION IMPORTANT IN FOREX TRADING?

Because the Forex market is made up of currency pairs, each pair is in some way related to another. Some currency pairs move in parallel, while others move in opposite directions.

Put simply, a Forex correlation table is crucial. You don’t want to take two trades that are essentially the same. And you also don’t want to take two trades that contradict each other. Both situations can occur if you’re unaware of correlations in Forex trading. Here’s an example…

Suppose you see a trade setup to buy EURUSD and also see a trade setup to sell USDCHF. If you take both trades, you’re essentially doubling your risk. Why? Because these two currency pairs are negatively correlated most of the time. So, if EURUSD goes up, there’s a very high chance that USDCHF will go down.

There are two options if you find yourself in this situation:

1. Take only one of the two trades

2. Cut your risk in half on each trade

While the second option is viable, in my opinion, it’s not entirely logical. Since the two pairs are more than 90% inversely correlated, both trades are essentially the same. Why manage two identical trades? It’s best to simplify things and take only one of them.

The next issue is that you don’t want to contradict yourself either. Using the same example, let’s say you see a trade setup to buy EURUSD and at the same time, a trade setup to buy USDCHF.

So what should you do?

Do you think something might be wrong with one of the two currency pairs? We know this because the two currency pairs are negatively correlated. If you find yourself in this situation, it’s best to go back to the chart and reassess your trade setups.

So far, we’ve discussed the importance of correlations in Forex. Let’s see how we can control our risk by using a correlation table.

2. WHAT IS A FOREX CORRELATION TABLE?

A Forex correlation table makes Forex trading easier by comparing the correlations between different currency pairs. This allows us to quickly identify whether two pairs move in tandem or in opposite directions.

An example of two pairs that move in parallel (or close to it) is AUDUSD and NZDUSD. This is because their economies share many commonalities, among other things. That doesn’t mean the two currency pairs move identically pip-for-pip; but at the time of writing, these two pairs have a positive correlation of 85% on the daily timeframe.

An example of two pairs that move in opposite directions is EURUSD and USDCHF, as discussed in the example above. Currently, these two pairs have a negative correlation of 94% on the daily timeframe.

One thing to note about Forex correlations is that they change over time. So while AUDUSD and NZDUSD have moved together with a positive correlation of up to 85% on the daily timeframe over the past 50 days, that correlation drops to 38% over the past 300 days.

3. TIMEFRAME ISSUES

Not all timeframes correlate equally. In fact, the correlation between two timeframes can even be a negative correlation for the same two currency pairs.

Here’s a snapshot of the correlation between AUDUSD and NZDUSD across four timeframes (over 50 periods):

• 5 minutes: -39.2%

• 1 hour: 14.3%

• 1 day: 85%

• 1 week: 19%

As you can see, the direction and strength of the correlation depend greatly on the timeframe you’re looking at.

4. FOREX CORRELATION TABLE

Below is a popular Forex correlation table, but first, let’s go over a few basic steps on how to use the tool. This table is quite easy to use, but these steps will help you get a quicker grasp.

4.1. Step 1

The first thing you’ll notice with the Forex correlation table is that it includes a key to explain the strength of the correlation. Get familiar with this chart and refer to it often. It provides a quick way to gauge whether two pairs are correlated or not.

4.2. Step 2

The second step (and the most important one) when using the Forex correlation table is to select the currency pairs. This is where you choose the pairs you want to display in the correlation table.

4.3. Step 3

This is where you can customize the correlation calculation period. The default is 50 periods. If you decide to increase or decrease this number, just be aware that it may negatively affect the reliability of the correlation. The default setting of 50 periods is the most commonly used.

4.4. Step 4

Once you have set the parameters in steps 2 and 3 according to your preference, click on “Submit.”

5. RESULTS

After you click on “Submit,” scroll down to view the results. As you scroll down the page, you will notice four different timeframes for the currency pairs you have selected.

Tip: Use your cursor and hover over the correlation you want to see. This makes reading the chart much easier.

Here is an image of the daily Forex correlation table. Positive numbers indicate that the currency pairs have a positive correlation, while negative numbers mean they have a negative correlation. A strong correlation is any number above 80, while a weak or no correlation is below 60.

This is the final Forex correlation table you will need. Tradafx hopes that through this series of Forex knowledge articles, the Forex correlation table will be as useful to you as it has been to others and will continue to be beneficial for other traders.