Correlated currencies

[Johng]

Hi
I have spent the last few weeks paper trading, and have developed a strategy based on currencies where there is a direct correlation between different pairs. On paper, I have doubled my pips as a result. I will soon be working my strategy on a live platform. In one week I made 1,000 pips with this strategy.

If you look at the GBP/ USD pair and then at the Eur/GBP pair, you can see a definate negative correlation. When GBP / USD rises then the Eur/GBP pair decreases. Conversely, if the GBP/USD pair decreases, then the Eur/GBP increases. The trend of one pair is almost automatically reflected in the other pair in the opposite direction.

Similarly, if you look at the Eur/USD pair and the USD/CHF pair, then there is a direct negative correlation.

If you look at the GBP/USD pair and the GBP/JPY pair, there is a positive correlation, whereby if GBP/USD increases in value, then so does the GBP/JPY.

What this means is that you need to be certain of the trend to place multiple trades, and work quickly to close the positions when the trend of the leading currency - GBP/USD and EUR/USD - reverses.

I hope you find this useful.

John