Trading strategy on correlations of currency pairs Disparity System
Currency pair correlation is the interdependence of the movement of different currency pairs. If, for example, the dollar rate is growing, the currency pairs with the dollar will move in one direction and may even repeat the movements of each other. There are two kinds of correlations. A straight line is when two different currency pairs move almost equally, repeating impulse jumps and price corrections. The reverse is when the movements are exactly the opposite. Examples of direct correlations are EURUSD and GBPUSD, and inversely EURUSD and USDCHF. This relationship can be used to trade in the Forex market.
There is a correlation indicator that can show two different currency pairs on the same chart. The “OverLay Chart” indicator can be set on a chart of any currency pair and set additional pair in the settings. In the settings, you can also change the colors as you wish. The “Mirroring” parameter is very important. It determines the mirroring of the additional currency pair against the main one. If the pairs to be compared are inversely correlated, you should set “Mirroring = true”
On the EURUSD chart we set an additional GBPUSD chart.
This chart shows a good example of using correlation. The GBPUSD pair moves one day identically to EURUSD and starts to decline with it the next day, but then goes up. However, EURUSD continues to decline, so you can easily sell GBPUSD here. It’s an example of a clear diversion.
There are many variants of using correlation. This can be the detection of early trend reversal signals or the faster formation of patterns on one of the pairs. Correlation can be used for a standalone system or as an additional filter to refine the input. However, it is also important to take into account the correlation coefficient. This indicator varies from pair to pair and is constantly changing. You can get to know him here. The closer this parameter is to one, the more accurate the signals will be.