Correlation Matrix
Correlation Matrix: Managing Multi-Pair Risk
Currency Correlation measures how two currency pairs move in relation to each other. Understanding correlations is essential for managing risk when trading multiple pairs simultaneously.
What is Correlation?
Correlation is measured on a scale from -1.0 to +1.0:
| Value | Meaning |
|---|---|
| +1.0 | Perfect positive correlation — move in exactly the same direction. |
| +0.5 to +0.9 | Strong positive correlation — tend to move together. |
| 0 | No correlation — move independently. |
| -0.5 to -0.9 | Strong negative correlation — tend to move in opposite directions. |
| -1.0 | Perfect negative correlation — move in exactly opposite directions. |
Key Currency Correlations
Highly Positively Correlated
- EUR/USD and GBP/USD (~+0.80) — Both are "anti-dollar" pairs.
- AUD/USD and NZD/USD (~+0.85) — Regional neighbors with similar economies.
- EUR/USD and AUD/USD (~+0.70) — Both tend to move against USD.
Highly Negatively Correlated
- EUR/USD and USD/CHF (~-0.90) — Almost mirror images.
- GBP/USD and USD/JPY (~-0.60) — Moderate inverse relationship.
- AUD/USD and USD/CAD (~-0.70) — Commodity currencies vs USD.
Why Correlations Matter
1. Avoid Doubling Risk
If you buy EUR/USD and buy GBP/USD, you essentially have two long-USD-short positions. If the dollar strengthens, both trades lose. You've doubled your risk without realizing it.
2. Hedging Opportunities
If EUR/USD and USD/CHF are negatively correlated, buying both can create a natural hedge. One position's losses are partially offset by the other's gains.
3. Diversification
By trading pairs with low or no correlation, you spread your risk across independent market forces.
How to Use a Correlation Matrix
Step 1: Check Correlations Before Opening New Trades
Before opening a second trade, check how it correlates with your existing positions:
- Correlation > +0.7: Avoid — you're essentially doubling the same bet.
- Correlation between -0.3 and +0.3: Safe — the trades are independent.
- Correlation < -0.7: Only open the opposite direction for hedging.
Step 2: Adjust Position Sizes
If you must trade correlated pairs, reduce the position size of each:
- Trading 2 positively correlated pairs? Cut each position size in half.
Where to Find Correlation Data
- Myfxbook Correlation Tool — Real-time correlation matrix.
- OANDA Correlation Calculator — Historical correlation data.
- TradingView — Overlay two pairs on the same chart visually.
Correlations Change Over Time
Correlations are not fixed. They can shift based on:
- Central bank policy changes.
- Geopolitical events.
- Commodity price changes.
- Risk sentiment shifts.
Re-check correlations periodically (weekly or monthly) to ensure your assumptions are still valid.
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