Forex Pairs Price Movement Correlation - How can it be used?

2025-Apr-13

Forex pair correlation is a powerful tool in a trader’s toolkit. Let’s break it down and then go into a practical example.

Why is Forex Correlation Important?

Risk Management: Trading highly correlated pairs in the same direction increases exposure. If both go against you, your losses double.
Hedging: You can reduce risk by taking opposite positions in negatively correlated pairs.
Diversification: Low or non-correlated pairs reduce overexposure to the same market move.
Strategy Confirmation: Correlated pairs moving in the same direction can confirm trend strength.

How Price Correlation Can Be Used

Below is a table showing the price correlation matrix for the Major Forex Pairs. Correlation values range from -1 to 1:

1 = perfect positive correlation (move together)
0 = no correlation
-1 = perfect negative correlation (move in opposite directions)

We'll use the Major Forex Pairs:

EUR/USD
GBP/USD
USD/JPY
USD/CHF
AUD/USD
NZD/USD
USD/CAD

Here’s a sample correlation table based on historical daily data (correlations may vary slightly depending on timeframes and market conditions):

A screenshot of a graph

AI-generated content may be incorrect.

A screenshot of a computer

AI-generated content may be incorrect.

Example of Using Correlation in a Strategy

Let’s observe two (2) examples for the above table data.

One with Negative Correlation and one with Positive Correlation:

EUR/USD and USD/CHF → High negative correlation (-0.95)

Example Strategy: Hedging via Inverse Correlation

You believe the USD will weaken, so you go long EUR/USD.
Because EUR/USD and USD/CHF move in opposite directions, you go short USD/CHF at the same time.
If the USD weakens:
- EUR/USD rises → profit
- USD/CHF falls → profit
If the USD strengthens (your initial thesis was wrong):
- EUR/USD falls → loss
- USD/CHF rises → profit
One loss is partially or fully offset by the other gain = reduced risk exposure.

AUD/USD and NZD/USD → Strong positive correlation (0.90)

Example Strategy: Trend Confirmation

AUD/USD breaks a key resistance level and starts trending up.
You check NZD/USD — it's also breaking resistance and trending up.
High correlation and aligned breakout add confidence to your long trade on AUD/USD.
Alternatively, you can split your position between both for more balanced exposure.

Final Thoughts

Correlation is not static - it changes over time based on:

Economic events
Interest rate decisions
Geopolitical changes

Pro tip: Use correlation in combo with technical analysis, fundamentals, and news to improve edge - don't rely on it in isolation.

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Forex Pairs Price Movement Correlation - How can it be used?

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