Correlation of currencies as it may affect currency pairs have serious consequences in the field of trade in a forex trader. If the trader isn’t up to date about various correlations among currency pairs, then he may experience lower profits, or he might take on further risk. What is the correlation of the currency? Currency correlation means that it is a relationship that can be measured statistically between the two securities. With regards to the forex market, it would refer to the relationship between two pairs of currency. The correlation between these pairs are referred as positive or negative. They will either move together in a positive direction, or they will move together in a negative and opposing direction. The correlation coefficient efers to the degree of correlation. It ranges between -1 and +1.

A positive correlation means that 100 percent. On the other hand, -1 means 100 percent negative correlation. Examples of a positive relationship when you look at the EUR / USD and GBP / USD, you will see that these currency pairs have a positive correlation. In fact, they are almost identical, particularly over a long period of time. This means that at a time, the correlation between the pairs is very positive. This will be more apparent over a long time period, and not necessarily over a short period of say, a few days. The reason for this is because the € (EUR) and Pounds Sterling (GBP), the European currencies. As such, they are based upon the same fundamental principles. So these two is the same way, behave in relation to U.S. Dollar (USD).

Some Basic Guidelines

Here are some general rules for clarification:

The correlation between two currency pairs becomes more significant when viewed over a long period of time. As with the correlation coefficient, the greater the positive or negative number, the greater the degree of correlation.

It’s key to get a correlation at the 0. 0 level, positive or negative. This provides the strongest correlation.

If the value is below 0. 5, c really is no correlation.

How Is This Important to Forex Trading?

If the trader knows in advance the correlation amongst various currency pairs, then the trader can take better positions and avoid undue risk. If operator positions will be opened in two currency pairs is positively correlated, then there would be a doubling of the risk. On the other hand, if he were to go with two negatively-correlated currency pairs, his risk would be lowered, but so would the profit margin potential. In the end, currency traders do yourself a favor, by knowing in advance that the currency pairs strong correlation.

Watch the full 121st episode of The Keiser Report on Tuesday. This week Max Keiser and co-host, Stacy Herbert, talk about the Shoe Throwing Index, Saudi oil reserves and haircuts on investors. In the second half of the show, Max talks to investment adviser, Barry Ritholtz, about program trading and agnotology. Keiser Report on FB: www.facebook.com

www.informedtrades.com A lesson on crowd psychology and how it relates to trading the stock, futures, and forex markets. The best summary that I have seen on this subject, as well as a great book on trading in general is Dr. Alexander Elder’s book Trading for a living. As the Trader and Psychologist points out in his book, people think differently when acting as part of a crowd than they do when acting alone. Dr Elder points out that “People change when they join crowds. They become more credulous, impulsive, anxiously search for a leader, and react to emotions instead of using their intellect.” In his book Dr. Elder gives several examples of academic studies which have been done which show that people have trouble doing simple tasks such as choosing which line is longer than the other when put in a situation with other people who were instructed to give the wrong answer. Perhaps no where is the strange effect is the psychology of crowds seen than in the financial markets. One of the more recent examples as I have spoken about in my other lessons of the effect that the psychology of crowds can have on the markets is the run-up of the NASDAQ into 2000. As you will find by pulling out the history books however, this is not an isolated incident as financial history is littered with similar price bubbles created and then destroyed in the same way as the NASDAQ bubble was. So why does history continue to repeat itself? As Dr. Elder points out in his book, from a primitive …

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Watch full 120th Episode on Thursday. This time Max Keiser and co-host, Stacy Herbert, talk about eco-eco disasters, JP Morgan taking gold as collateral and Rand Pauls call for ending welfare to Israel. In the second half of the show, Max talks to investment adviser, Joshua Brown, about investing for freak weather and a dictator free Middle East.

This time Max Keiser and co-host, Stacy Herbert, talk about fake rice and real inequality and about a ‘new model’ that looks a whole lot like an old model called capitalism. In the second half of the show, Max talks to Pierre Jovanovic, author “Blythe Masters,” about credit default swaps, the Queen of commodities and Marie Antoinette.

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This time, Max Keiser and co-host, Stacy Herbert, talk about French President Nicolas Sarkozy going postal on JP Morgan CEO, Jamie Dimon and about the US Drug Enforcement Agency goes Village People with their big lipped rubber ducky for sale. In the second half of the show, Max talks to Sandeep Jaitly of Bullionbasis.com about a gold standard, backwardization and the Austrian school of economics. Keiser Report on FB: www.facebook.com