Currency correlation

Currency correlation is a measure of how closely two currency pairs move together. It runs from −1 (always opposite) to +1 (always together); 0 means no link.

How it works

Pairs are linked because they share currencies. EUR/USD and GBP/USD both depend on the dollar and often rise and fall together: positive correlation. EUR/USD and USD/CHF often move as mirror images because the dollar sits on opposite sides: negative correlation.

For a trader this is mostly about risk. Two trades on strongly correlated pairs behave almost like one position of double size. If the market turns against you, both stops get hit at once.

Correlation is calculated from price history over a chosen window, for example 1 or 3 months. It is not fixed: it shifts after news, central bank decisions and during panics.

Example with numbers 1

You buy EUR/USD and GBP/USD, risking 1% of your account on each. It feels like two separate trades. But with a correlation around +0.8, a stronger dollar pushes both into loss almost together, so your real risk is closer to 2% on one idea. Cut the size of each, or pick one pair.

Example with numbers 2

You buy EUR/USD and USD/CHF at the same time. With a correlation around −0.9, one trade nearly cancels the other: you pay two spreads and get almost no movement.

Common mistake

The most common mistake is thinking several trades on different pairs means diversification. If they all hinge on the dollar, it is one bet spread across several tickers. Before opening a new position, check whether you already hold a trade on a similar pair, and count the risk for the whole group at once.

Questions and answers

What is currency correlation in simple terms?

It is how much two pairs move together. Positive means the same direction, negative means opposite directions, zero means no link.

Which currency pairs are highly correlated?

EUR/USD and GBP/USD often move together, as do AUD/USD and NZD/USD. EUR/USD and USD/CHF often move opposite each other. The numbers change, so check recent data.

How do traders use currency correlation?

Mainly to avoid stacking risk: do not open several trades in the same direction on strongly correlated pairs. Some also use it to hedge, but that costs spreads and swaps.

Currency correlation

How it works

Questions and answers

Related terms

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