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Inter-Currency-Correlation
Good Morning all.
Today I will talk about inter-currency-correlation.
We are only interested in trading GBPUSD EURUSD USDJPY GBPJPY & ERJPY with this strategy and there are certain reasons for this.
The main reason is that an added advantage of trading the Yen pairs for example is that we can get a pretty good idea of how powerful the moves will be.
On the other hand we can guage overall dollar strength/weakness by looking at the 3 USD pairs, gbpUSD eurUSD USDjpy.
Why do we need to look at USD pairs when trading Yen?
Well, USDJPY and GBPUSD are the driving force behind GBPJPY and USDJPY and EURUSD are the driving force behind EURJPY.
Imagine it like a game of football/soccer.
All these currencies are benchmarked against the dollar. Perhaps not the correct term but I like to see GBPUSD as a general benchmark of GBP strength. I like to see EURUSD as a general benchmark of EUR strength and so on.
So, back to footy, if pound can beat dollar (GBPUSD up) and if dollar can beat yen (USDJPY up) then on the form-book, what should pound do to yen??
Very simply, pound should annihilate yen (GBPJPY moves up aggressively)
Take a look at the screen shot below.
It clearly demonstrates exactly what I am saying, so the secret here when trading Yen pairs it to monitor the two pairs that make-up the particular yen pair.
If USDJPY is flatlining and GBPUSD moves up then can GBPJPY move up still?
Absolutely yes it can. Not as aggressively and more likely to be a sterling move than a yen move, but we'll come onto that later.
Can EURJPY move up if EURUSD is moving up aggressively and USDJPY is moving down aggressively?
Usually no, due to a tug of war beween euro strength and yen strength.
That gives you the foundations of how currency correlation works.
Learn it well, backtest it and remember it. It's one of the most valuable lesson you'll learn.
Next we'll cover the pairs to watch.
I will incorperate EURGBP into this too just so my charts tile nicely.
I will also give you an idea of what to loook out for before moving on to moving averages and how best to use these to your advantage.
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I'm now sending trading notes out twice a day with videos too. Have a look HERE.
There's one set at 6:30 UK time for London and one at 12:00 for U.S session, plus I will send a summary video after each session 
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