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Chapter 37, Part I. Intramarket Correlations. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Commander in Pips: Well this is very simple. We will use an Excel work sheet for that purpose. First, we need quotes for some period of time on two different pairs. Let’s say we want to estimate the correlation between daily charts for EUR/USD and GBP/USD pairs from November 1st. First, we have to extract from our software quotes data of both pairs. Quotes should be on the same time frame – daily EUR/USD – daily GPB/USD, weekly - weekly and so on. Then you have to use build-in function CORREL in Excel – and tada! – we see correlation for the period November 1st till December 14th of 0.93 or 92.86%. This is a very significant correlation. The most important thing is that this correlation will not remain static – it will change over time. Even more, the fact that EUR and GBP correlation on the daily chart is 0.92 for our sample does not mean that this correlation will be the same for weekly, monthly or, say hourly time frames. It will be different. As well, correlation will change as you will use different data array. We use 1.5 months of data (from 1st of November till 14th of December). If you will use, say a 3 month array of data – then the correlation will be different.


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    Very often correlation is shown by correlation tables. They can be two kinds – for two pairs but for different time frames, or for single time frame but for multiple pairs:

    Here is first example – when correlation table (or matrix) was created for the same period of analysis (say, 3 months), quotes of all pairs were daily. So, on crossing of any column and row we see corresponding Correlation. For example on crossing EUR/USD and GBP/USD we see our number of 0.9286.


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    Pipruit:
    And why EUR/USD to EUR/USD correlation is 1, and for other repeated pairs? And why EUR-GBP correlation equals to GBP-USD correlation?



    Commander in Pips: Hm. Since EUR/USD is repeated itself, that’s why it totally related with itself, hence correlation equals 1. Now, since EUR/USD to GBP/USD shows the same relation as GBP/USD to EUR/USD, then their correlation is the same. This is obvious once you understand how it works.
     
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