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Originally Posted by fxd01
Hi forex experts,
I've been trying to learn/understand the correlation between currency pairs. If I take GBPUSD and EURUSD as the pairs that move in the same direction, can you please answer the following? The assumption is that both these pairs move up or down fairly closely.
If I buy GBPUSD and sell EURUSD, I expect these two pairs cancel each other each other Profit/Loss and end with a negative balance which is the sum of the spread from both the trades.
However when one pair moves drastically and the other pair has a low momentum, the theory is that these pairs will catchup eventually. But when and how?
On Sep 4th I bought 1 lot GBUSD and sold 1 lot EURUSD at the same time. Now these trades stand at GBPUSD at -4000 and EURUSD at +1700. Basically after trade GBPUSD is down by 400 pips while EURUSD moved ony 170 pips. That is a huge difference. My questions are,
- As these are correlated pairs, the price move has to come back to normal. Is GBPUSD going to go up ( to -170 pips from the current -400pips) to be in synch with EURUSD OR Is EURUSD going go down to (from +170pips to -400pips) to keep the correlation?
- Now the difference between these two pairs is 400-170=230pips. Is there are chance to buy/sell these pairs to pocket some money from the expected correlation?
Here is the trade information
trade-1
4-Sep-06 1:40pm buy GBPUSD @ 1.9065
current price : 1.8652
current pl : -4000
trade-2
4-Sep-06 1:40pm SELL EURUSD @ 1.2855
current price : 1.2677
current pl : -1700
any help is appreciated.
Thanks.
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There are 3 kinds of correlations between pairs:
1- Strong positive correlation: The pairs are going at the same direction and very close to each others: Example: eurusd and gbpusd are strong positive correlation.
2- Strong negative correlation: The pairs are going at the opposite direction and very close to each others: Example: eurusd and usdchf are strong positive correlation.
3- Weak (or No) correlation: The movement of the 2 pairs is not related to each others at all or it's very weak!
But: The strong correlation between 2 pairs doesn't mean that the 2 pairs have to move the same strength all the time! And doesn't mean that if one of the pairs moved stronger at anytime the other pair has to go to compensate the missed movement!
If you want to know why the gbpusd and eurusd have been broken their strong positive correlation you have to give the eurgbp a look and you will find something had happened there!
Note: I'll release soon a program that takes 2 pairs and tell you how positive/negative/strong/weak the correlation between them is.