Mirror Pairs in ForexFriday, 4 August 2017 15:40
We can observe the phenomenon of correlation in various aspects of life. In the Forex market, correlations take place quite often.
- Within the direct correlation, prices of two currency pairs move in the same direction.
- Within the reverse correlation, the currency pairs move in the opposite directions, due to the same factors. Such pairs are called mirror pairs.
The correlation coefficient varies from 0 to +1 for a direct relation and from -1 to 0 for a mirror relation. In this case, the values of 1 and -1 mean the strongest relationship, which is also called the ideal correlation. The zero value of the coefficient indicates that there is probably no relation between the quotations.
If there is a negative correlation, the charts of the two currency pairs reflect each other:
The instruments of inverse correlation include such pairs as EUR/GBP and GBP/CHF, CAD/CHF and EUR/CAD, EUR/AUD and AUD/CHF, as well as EUR/NZD and NZD/CHF. Mirror pairs with the euro and the Swiss franc are explained by the constant ratio between these two currencies, maintained by the strict regulation.
Mirror Pairs in Trading
Knowing the relations between the currency instruments, a trader can avoid some mistakes, as well as make the right decisions in the face of the controversial situations.
For example, if you see that there is a sharp change on the chart of the first pair, but nothing happens with the second one - this means that a temporary speculative activity causes the jump and nothing is to be done.
Suppose you’re trading a CAD/USD pair. You look at the chart, and you see that after a long upward movement, the price stops, and then starts turning in the opposite direction. It’s difficult to stay calm in such a situation since your possible losses increase with every second. Knowing that this tool is in reverse correlation with the USD/EUR pair, you can look at the chart of the latter one, and predict the further dynamics. The second graph will be displayed with a delay, but its readings will be directly opposite to the first one.
Many experienced traders use such pairs as a leading signal. Knowing that they always move in the opposite directions, but with a delay, you can open the EUR/USD chart, and looking on it, adjust your positions on the USD/CAD pair.
The inverse correlation also gives the trader the opportunity to hedge losing trades, waiting for the end of the correction.
It should be noted that such relations are also observed between the USD/CAD pair and oil futures. If oil price grows, the price of the currency pair will fall and vice versa.
Use this knowledge in practice, and it will save your deposit from the losses and help get more profit from the transactions.