Should You Trade Correlated Forex Pairs?

Podcast:

#371: Should You Trade Correlated Forex Pairs?

In this video:

00:23 – Trading correlated pairs and the TFTC Pattern Trader results update

00:36 – Confusion over trading correlated pairs

01:38 – Other correlated currencies

02:06 – Trading examples

04:27 – Trades from last week and how I traded the correlated pairs

05:52 – TFTC Pattern Trader update, +3.6% this week on autopilot

Should you trade correlated Forex pairs? Let's talk about that and more right now.

Hey traders, Andrew Mitchem here, at the Forex Trading Coach with video and podcast number 371.

Trading correlated pairs and the TFTC Pattern Trader results update

And I want to talk all about Forex pairs and trading correlated pairs and also, I want to give you an update on the autopilot feature for the trade results this week for our fantastic software called Pattern Trader.

Confusion over trading correlated pairs

So let's start with the question about Forex pairs and correlation. It came from a trader called Joseph and said to me, "Hey Andrew, I've got a question for you. I'm getting confused with knowing which pairs to trade and which are correlated. Can you help me out on a future video and podcast?" So, exactly what we're doing. You would notice that a lot of currency pairs are quite highly correlated. For example, the Euro and the Swiss Franc are highly correlated. And what the EUR/USD does, the USD/CHF generally does the opposite because they're both U.S. dollar related and the Euro and the Franc are related. So if the EUR/USD goes up, on your charts, generally, you will see the USD/CHF drop. You get other correlations acting like the Euro and the Pound, both are very similar markets, same time zone, et cetera. They tend to move quite similar, tend to.

Other correlated currencies

You get other correlations such as the commodity currencies. So in other words, the New Zealand dollar, the Australian dollar and the Canadian dollar, they all tend to move in correlation most of the time. And of course you get exceptions to that. And sometimes you'll get the Aussie dollar move up, as the Kiwi dollar moves down. That's generally something's happened, whether it be a news event or something to split that correlation, but overall, you will find similarities there.

Trading examples

And so an example of this would be, let's say you were trading the EUR/AUD. Now what the EUR/AUD does, let's say it moves up. You will find that the AUD/CHF will likely go the other way. And so you have correlation there because you've got the Australian dollar featuring in both of those. And you've got the Euro and the Franc, which are correlated, so that becomes the issue that some traders have.

And with Joseph, who said, he's confused with these, you can see why, and therefore you just need to be careful. Let's say you were trading the AUD/USD and that was a buy trade. You probably wouldn't want to be trading a sell trade at the same time on, let's say the NZD/USD, because you're unlikely to find the two would work out. Now, of course, there are exceptions again, you have to trade what you see and you have to have a trade plan in place. So if your plan is to take those two trades, regardless, then you do so. But if they're on the same time frame chart, and they show at the same time of the day, then its quite likely there that one's going to work and one, maybe not.

So what you need to do as a trader is you need to do one of few things. You have to look at this and go, do you know what, I'm going to take them both, but I'm going to reduce my risk on each trade. That is one option, or you can look at them and go, I need to take the strongest of these, so if the AUD/USD, let's say it's showing a bullish signal and the NZD/USD is showing a bearish signal. What I would then do is go and have a look at the AUD/NZD pair. And on that, you're likely to see that the AUD/NZD is moving up as well,...