correlation coefficient, which timeframe coefficient to use? | Forex Factory

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correlation coefficient, which timeframe coefficient to use?

  • #1
  • First Post: Edited Jun 9, 2016 2:01am Jun 8, 2016 10:32pm | Edited Jun 9, 2016 2:01am
which correlation coefficient do i look at and why, when pondering whether or not I should enter another trade that could be too correlated to the first? there are daily, hourly, monthly etc coefficients to choose from (i'm using online websites for this), and some of those websites don't even have the monthly or yearly coefficient. and some people work it out using excel themselves (get different values maybe??.) . confusing...
i'm looking at hourly trend trades (for now), and 4h as well, but i don't know if that means i should look at the same timeframe coefficient, or what, and why.

beginner here...thank you
added: i plan on having about 5% exposure (typical) so i will need to open up a 2nd trade while the first is yet to get to BE.
  • #2
  • Jun 9, 2016 12:29am Jun 9, 2016 12:29am
Quoting captain13
(i stuffed up the title of my other post so re-posted it here...) which correlation coefficient do i look at and why, when pondering whether or not I should enter another trade that could be too correlated to the first? there are daily, hourly, monthly etc coefficients to choose from (i'm using online websites for this), and some of those websites don't even have the monthly or yearly coefficient. and some people work it out using excel themselves (get different values maybe??.) . confusing... i'm looking at hourly trend trades (for now), and 4h...
Hi newbie!

First thing is that correlations are not static. They do fluctuate. Generally speaking, EUR, GBP, AUD and NZD pairs move together. JPY pairs move together. CHF and CAD pairs move opposite EUR and GBP pairs. That is a very, very loose template for you. I would suggest using one pair starting out, the lower the spread, the better you are.
If you are good at something, never do it for free--Joker
  • #3
  • Jun 12, 2016 7:28am Jun 12, 2016 7:28am
Quoting jmn5611
{quote} First thing is that correlations are not static. They do fluctuate.
There can be different degrees of correlations between two currency pairs in different timeframes. Which one you'd consider depends, of course, upon the timeframe you intend to work with. But correlation coefficients could be misleading. A better guide is to look at the charts of the concerned currencies in the chosen timeframes and notice if the pairs are making similar movements.

Look at the first row of charts below showing three pairs at the same moment of time. EURJPY5m (middle chart)is making similar movements as EURUSD and should be having a high degree of correlation with EURUSD for this timeframe at that time.

Now notice the second row of charts saved just a few hours later. Now EURJPY is moving along following USDJPY rather than EURUSD and is thus having a higher correlation with USDJPY at that time.

Now, averaging out, probably over the course of the day, EURJPY can be shown to have had a lesser degree of correlation with both EURUSD and USDJPY, but that figure would omit the fact that it had higher correlations with its parent currencies (for want of a better term) at different times of the day.
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  • #4
  • Jun 12, 2016 7:49am Jun 12, 2016 7:49am
Quoting GnWFx
{quote} There can be different degrees of correlations between two currency pairs in different timeframes. Which one you'd consider depends, of course, upon the timeframe you intend to work with. But correlation coefficients could be misleading. A better guide is to look at the charts of the concerned currencies in the chosen timeframes and notice if the pairs are making similar movements. Look at the first row of charts below showing three pairs at the same moment of time. EURJPY5m (middle chart)is making similar movements as EURUSD and should...

Good post there. If correlations were static, our jobs would be so much easier. Keep working. If you are not making money yet, you will be soon enough.
If you are good at something, never do it for free--Joker
  • #5
  • Jun 13, 2016 10:35am Jun 13, 2016 10:35am
thanks for the advice. and i looked at all the pairs and found similar movements... much more correlated than i thought. when things are breaking out at the same time and looking similar, i'll try to pick one currency (or diversify)
  • #6
  • Last Post: Oct 21, 2017 5:36am Oct 21, 2017 5:36am
To be honest, I don’t think the correlation is such a good strategy to follow! Yes, sometimes it works! But, that doesn’t mean you can rely on this strategy for every time. Many times, I open sell trade on EUR/USD when I have buy trade on GBP/USD.
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