How do pairs and their currencies correlate?

[superherobyday]

Have some questions about the forces behind the charts.

1) Do currencies move alone, as pairs, or both? For instance, does the EURO change in value independently and thereby affect all EUR pairs? Or do the movements in the various EUR pairs change the value of the EURO as a whole? Or both?

2) Similar to question 1. Is the index of a currency essentially just an "indicator" derived from all its pairs? Or can it be considered the 'true' value of a currency, while the pairs all fluctuate?

3) Is the chart of a cross pair (say EUR/JPY) a derivative of the two underlying major pairs (EUR/USD & USD/JPY)? Or is it an actual independent derivative of the two currencies (EUR & JPY)?

Essentially I'm trying to pin down the correlations between currencies, currency pairs, and cross pairs. Any wisdom, or even a point in the direction of knowledge is appreciated.

Cheers

 

[RahmanSL]

In a nutshell, all currency are affected by economies of their own or their trading partners economies.....a good example is the AUD which is not only affected by their own domestic economy, but their biggest trading partner China, the US, etc.....but because Australia exports a lot of commodities (iron ore, aluminum, gold, etc) and dairy & farm products (meat, milk, cheese, oranges, apples, etc) their economy will be affected by the rise & fall of these commodities and dairy & farm products.

Your questions have been discussed/given at various sites. On our FPA go to to top of the page and click on "Education and Forums"....select "Forex Military School"......chapters 22 & 28 should answer most of your questions, but I would recommend that you read the rest of the other chapters too.

 

[EURUSD]

Have some questions about the forces behind the charts.

1) Do currencies move alone, as pairs, or both? For instance, does the EURO change in value independently and thereby affect all EUR pairs? Or do the movements in the various EUR pairs change the value of the EURO as a whole? Or both?

2) Similar to question 1. Is the index of a currency essentially just an "indicator" derived from all its pairs? Or can it be considered the 'true' value of a currency, while the pairs all fluctuate?

3) Is the chart of a cross pair (say EUR/JPY) a derivative of the two underlying major pairs (EUR/USD & USD/JPY)? Or is it an actual independent derivative of the two currencies (EUR & JPY)?

Essentially I'm trying to pin down the correlations between currencies, currency pairs, and cross pairs. Any wisdom, or even a point in the direction of knowledge is appreciated.

Cheers

As I know, each currency has strength to another currency so it moved independently but there is tendency for some pairs are moving in the same direction or opposite direction which is said as correlation pair. Example : EUR/USD and GBP/USD are positive correlation because there is tendency to move in the same direction. This condition is happening because both pairs are containing USD currency and another currency (EUR and GBP) are coming from same regions (Europe) so there is tendency if the condition in the country is affecting one and another.

 

[iMusingKiMi]

Have some questions about the forces behind the charts.

1) Do currencies move alone, as pairs, or both? For instance, does the EURO change in value independently and thereby affect all EUR pairs? Or do the movements in the various EUR pairs change the value of the EURO as a whole? Or both?

2) Similar to question 1. Is the index of a currency essentially just an "indicator" derived from all its pairs? Or can it be considered the 'true' value of a currency, while the pairs all fluctuate?

3) Is the chart of a cross pair (say EUR/JPY) a derivative of the two underlying major pairs (EUR/USD & USD/JPY)? Or is it an actual independent derivative of the two currencies (EUR & JPY)?

Essentially I'm trying to pin down the correlations between currencies, currency pairs, and cross pairs. Any wisdom, or even a point in the direction of knowledge is appreciated.

Cheers

I will recommend to you to have a look on Dollar Indexes rather than looking plainly on the charts. Below shows why they are correlated if they doesn't have their own major news or strengths.

Euro (EUR), 57.6% weight
Japanese yen (JPY) 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight
Swiss franc (CHF) 3.6% weight

For instance, EURO weight 57.6% on the Dollar Index. Therefore, no matter what happens between EUR or USD, both of them are against each other. eg. Strong EURO = Weak USD. In another example, many people like to trade Cable due to their noise, but it is actually more profitable to trade EUR instead of Cable unless it has its own strength or weakness. Every Cable moves rely on EUR if they doesn't have major news instead of every amateur saying that they are just like brother and sister instruments or because they are in EURO area. This is all due to dollar indexes movement that makes them move together when the strength or weakness are on Dollars. Study Dollar Index, and you will get your picture why correlation happens.

 

[iMusingKiMi]

Another good example for you on Aussie and Kiwi. Never trade Aussie and Kiwi if the strength are on the Dollars. You have to pay more spreads, but lower volatility about 50% lower than EUR/USD when the move are just because of the Dollars. Never trade Aussie and Kiwi when they are not in the same direction. By technically, you will never have the edge of trading if both of them in opposite direction which brought you to only 50/50 situation.

 

[iMusingKiMi]

We will take today a highly good example on the Dollar NFP strengths in related to the Dollar Indexes. We can see what is the difference between EUR/USD and GBP/USD. Cable is a very high volatility market, but it only move 70 pips when it is on Dollar Weakness. But Euro edge 120 pips against the Dollar on today changes.

 

[kemer roach]

Actually, currency correlation is very important trading idea. I always use add this idea after making my technical and fundamental analysis. According to my currency correlation knowledge I am able to make quick money by Forex trading.

 

[iMusingKiMi]

Actually, currency correlation is very important trading idea. I always use add this idea after making my technical and fundamental analysis. According to my currency correlation knowledge I am able to make quick money by Forex trading.

Absolutely yes. Correlation plays a very very big role for profitable trading. This is those so called Guru never mentioned it on books. Probably the doesn't know, or probably they kept it as secret.

 

[workitout]

there's lot of article explain these, you may take a clue with 'basket trading'. it's more likely practical use of currency correlation. in my opinion better start with single pair traded, master it, get close to it, make it as primary traded pair. afterward you may move to another currency pair which correlate to your primary one.

 

[iMusingKiMi]

there's lot of article explain these, you may take a clue with 'basket trading'. it's more likely practical use of currency correlation. in my opinion better start with single pair traded, master it, get close to it, make it as primary traded pair. afterward you may move to another currency pair which correlate to your primary one.

Even trading single pair, you still need correlation for confirmation. For instance, how will you put the EUR/USD on bearish if Dollar Basket didn't edge higher?