Correlation in Forex
One of the reasons why I chose trading currencies over trading equity is the amount of information a trader is required to process in order to make an informed decision. In Equity trading a large percentage of the security price action is not due to the security itself but rather external factors such as overall market, industry reports etc…
As Forex traders, we are asked to think a bit more globally and follow the economy as a whole. A successful equity trader focuses on one industry, sometimes even only in one stock. A forex successful forex trader usually follow less then 5 pairs.
In this trillion-dollar a day market, correlations between currencies and commodities are very helpful. No correlation can last indefinitely, but knowing how currencies react to one another can give the trader an edge.
Kathy Lien over at FX360.com wrote a great article titled The Strongest Forex Correlations. I invite every trader novice and veterans to read this article. She explained how Oil and Gold affect the Loonie, the Aussie and the Kiwi. How the US dollar and the Euro react to the S&P 500.
Knowing correlation will not make you a rich trader but it is one more tool we can put in our trading arsenal. Having the tools will make you prepared knowing when to use them will make you a successful trader.
