Currency correlations or forex correlations are a statistical measure of the extent that currency pairs are related in value and may move together. If two currency pairs go up at the same time, this represents an immediate correlation, while if one appreciates and thus the opposite depreciates, this is often often a indirect correlation.
A foreign exchange correlation is that the connection between two currency pairs. There is a direct correlation when two pairs move within the same direction, a indirect correlation once they move in opposite directions, and no correlation if the pairs move randomly with no detectable relationship. A indirect correlation also can be called an inverse correlation.
Currency correlation is vital for traders to know because it can have an immediate impact on forex trading results, often without the trader’s awareness.
As an example, assume that a trader buys two different currency pairs that are negatively correlated. The gains in one could also be offset by losses within the other, which is usually used as a hedging strategy. Meanwhile, buying two correlated pairs may double the danger and profit potential, since both trades will end in a loss or profit. They are not fully independent since the pairs move within the same direction.