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Chapter 37, Part I. Intramarket Correlations. Page 4

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

    Aug 28, 2009
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    Commander in Pips: Ok, let’s turn to some examples:

    Chart #1 | EUR/USD and GBP/USD 60-min

    Just to confirm our calculation, although it was made on daily quotes – here you can see 60-min charts of EUR/USD and GBP/USD. They move quite simultaneously and are very harmonic. Let’s suppose that you think – “I will open one position with EUR/USD and another one with GBP/USD – this will be diversification and risk reducing issue.” In this case you will be wrong, since high correlation tells us that adding of GBP/USD will not give you any risk reduction – instead, it's vice versa. It will increase your risk, because the EUR and GBP very often move in the same direction. I tell you what, I give you a bit naïve understanding of correlation, but it might be useful and let you better understand this kitchen. Since we have it at 0.93 – treat it as replacement of 1 lot of GBP/USD with 0.93 lot of EUR/USD. Now imagine that if you will open 1 lot in EUR/USD and 1 lot in GBP/USD – this will be equal to 1.93 lot of EUR/USD. So, you almost double your risk, not reduce it!

    Well, and what if I open 1 Long lot EUR/USD and 1 short lot of GBP/USD?
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