Correlation is a statistical measure that describes the relationship between two random variables. When one variable changes, it affects the other and vice versa. In mathematical terms, the correlation between two random variables is measured by the correlation coefficient.
The concept of correlation is also used in forex to describe the relationship between currency pairs. By understanding the direct or inverse correlation between different pairs, traders can predict the movement of one pair based on the movement of another, taking into account time differences.
Similar to mathematical analysis, correlation in forex can be parallel (positive) or mirror (negative). In a parallel correlation, an increase in the price of one currency pair leads to an increase in another, and vice versa. In a mirror correlation, an increase in one currency pair leads to a decrease in another.
If currency pairs move in the same direction with minimal time lag, the correlation coefficient will approach 100%. If they move in opposite directions, the coefficient will be -100%. It should be noted that the closer the correlation coefficient is to 0, the weaker the relationship between the currency pairs.
More about correlation in forex
FAQ
What is currency correlation?
Currency correlation measures the relationship between two currency pairs, showing how they move in relation to each other.
How does positive correlation work?
In positive correlation, an increase in one currency pair leads to an increase in another, and vice versa.
What is negative correlation?
Negative correlation means that an increase in one currency pair leads to a decrease in another.
