“exotic Currency Pairs: Diversifying Strategies For Profitable Trading In Australia”

“exotic Currency Pairs: Diversifying Strategies For Profitable Trading In Australia” – To be an effective trader, it is important to understand the sensitivity of your portfolio to market volatility. This is especially true when trading Forex. Because currencies are priced in pairs, no pair trades completely independently of the others. Once you know these correlations and how they change, you can use them to track your overall portfolio exposure.

It’s easy to see why currency pairs are so interdependent: If you’re trading the British pound against the Japanese yen (the GBP/JPY pair), you’re actually trading a derivative of the GBP/USD and USD/JPY pairs. ; therefore, GBP/JPY should have some correlation to one, if not both, of these other currency pairs. However, the interdependence between currencies comes from their pegs. While some currency pairs may move in tandem, other currency pairs may move in opposite directions, the result of more complex forces.

“exotic Currency Pairs: Diversifying Strategies For Profitable Trading In Australia”

Correlation, in the financial world, is a statistical measure of the relationship between two securities. The correlation coefficient is between -1.0 and +1.0. A correlation of +1 means that the two currency pairs move in the same direction 100% of the time. A correlation of -1 means that the two currency pairs move in opposite directions 100% of the time. A correlation of zero means that the relationship between currency pairs is completely random.

Most Traded Exotic Currency Pairs In The Forex Market

With this knowledge of correlation in mind, let’s look at the following tables, each of which shows the correlation between major currency pairs (based on recent actual trading in the forex markets).

The table above shows that EUR/USD and GBP/USD have a very strong positive correlation of 0.95 over the course of a month. This means that when EUR/USD rises, GBP/USD also rises by 95%. Over the past six months, the correlation has been weaker (0.66), but over the long term (one year), the two currency pairs are still strongly correlated.

In contrast, EUR/USD and USD/CHF had an almost perfect negative correlation of -1.00. This means that 100% of USD/CHF is sold when EUR/USD rises. As the correlation coefficients remain relatively stable, this relationship holds true over longer periods of time.

But the correlation is not always constant. Take USD/CAD and USD/CHF for example. With a coefficient of 0.95, they had a strong positive correlation last year, but the relationship worsened significantly in the previous month, dropping to .28. This could be due to a number of reasons that cause some national currencies to react sharply in the short term, such as rising oil prices (especially affecting the Canadian and US economies) or the Bank of Canada scam.

Diversification In Forex

It is then clear that the correlations change, which makes it even more important after the correlation changes. Sentiment and global economic factors are very dynamic and can change daily. A strong correlation today may not correspond to a long-term correlation between two currency pairs. Therefore, it is also important to look at the six-month follow-up correlation. This provides a clear perspective of the average six-month relationship between the two currency pairs, which is more accurate. Correlations vary for a variety of reasons, the most common of which include differences in monetary policy, the sensitivity of a particular currency pair to commodity prices, and unique economic and political factors.

The best way to keep current on the direction and strength of your correlation pairs is to calculate them yourself. It may sound difficult, but it’s actually quite simple. The software helps to quickly calculate the correlation for a large number of inputs.

Use a spreadsheet program such as Microsoft Excel to calculate a simple correlation. Many charting packages (some even free) allow you to download historical daily currency rates that you can import into Excel. In Excel, simply use the correlation function, which is =CORREL(Range 1, Range 2). One-year, six-, three-, and one-month back readings provide the broadest understanding of correlation similarities and differences over time; however, you can decide which or how many of these readings to analyze.

Although correlations may change over time, it is not necessary to update your numbers daily; It’s generally a good idea to update every few weeks or at least once a month.

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Now that you know how to calculate correlations, it’s time to look at how to use them to your advantage.

First, they help you avoid entering into two positions that cancel each other out. For example, knowing that EUR/USD and USD/CHF move almost 100% in opposite directions, you will see that you have a long EUR// portfolio. USD and long USD/CHF have virtually no position because, as the correlation shows, when EUR/USD rises, USD/CHF sells off. On the other hand, holding long EUR/USD and long AUD/USD or NZD/USD will double the same position because the correlation is so strong.

Diversification is another factor. Since the EUR/USD and AUD/USD correlations are traditionally not 100% positive, traders can use these two pairs to diversify their exposure a bit, while maintaining a fundamental directional view. For example, to express a bearish view on USD, instead of buying two lots of EUR/USD, a trader might buy one lot of EUR/USD and one lot of AUD/USD.

A perfect correlation between two different currency pairs allows for greater diversification and slightly lower risk. Furthermore, the central banks of Australia and Europe have different monetary policy views, so when the dollar rises, the Australian dollar may be less affected than the euro, or vice versa.

Best Exotic Currency Pairs To Trade

A trader can also use different pip or point values ​​to his advantage. Let’s take another look at EUR/USD and USD/CHF. They have an almost perfect negative correlation, but the value of a pip movement in EUR/USD is $10 per 100,000 units, while the value of a pip movement in USD/CHF is $9.24 for the same number of units. . This means that traders can use USD/CHF to hedge against EUR/USD exposure.

Here’s how hedging works: Let’s say a trader’s portfolio is one short lot of 100,000 units of EUR/USD and one short lot of 100,000 units of USD/CHF. When the EUR/USD rate increases by 10 pips or points, the trader will lose $100 in the position. However, as USD/CHF is opposite to EUR/USD, a short USD/CHF position would be profitable, likely moving higher by about ten pips to $92.40. This makes the net portfolio loss -$7.60 instead of -$100. Of course, this hedging also means less profit in the event of a strong EUR/USD sell-off, but in the worst-case scenario, the losses will be relatively small.

Whether you’re looking to diversify your positions or find alternative pairs to use your perspective, it’s important to know the correlation between different currency pairs and their changing trends. This is powerful knowledge for all professional traders who have more than one currency pair in their trading accounts. Such knowledge can help traders diversify, hedge or double their profits.

In order to be an effective trader and understand your exposure, it is important to understand how different currency pairs move in relation to each other. Some currency pairs move in tandem with each other, while others can be polar opposites. Knowing the correlation of currencies helps traders to manage their portfolios properly. Regardless of your trading strategy, and whether you’re looking to diversify your position or find alternative pairs to leverage your view, it’s important to keep in mind the correlation between various currency pairs and their trends.

What Is The Foreign Exchange Market (fx)

The recommendations in this table are from compensatory partnerships. This compensation can affect how and where listings appear. Does not include all offers available in the market. The general Forex market tends to trend more than the general stock market. Why? The stock market, which is really the market for many individual stocks, is governed by the micro-dynamics of specific companies. The Forex market, on the other hand, is driven by macroeconomic trends that can sometimes take years to play out.

These trends are best seen through major pairs and commodity block currencies. Here we take a look at these trends, where they are emerging and why. We will then look at what types of pairs offer the best opportunities for range trading.

There are only four major currency pairs in Forex, which makes the market easy to follow. Are they:

It’s understandable why the United States, the European Union, and Japan would have the most active and liquid currencies in the world, but why the United Kingdom? After all, India’s GDP by 2020 is larger ($2.65 trillion vs. $2.63 trillion for the UK), while Russia’s GDP ($1.57 trillion) and Brazil’s GDP ($2.05 trillion) will exceed the UK’s total almost coincides with economic output.

What Are Exchange Rates? Global Currency Market Explained

A common explanation

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