There is a correlation between Forex currency pairs. It may be positively correlated, neutral, or null correlated. Positive correlation means that both currency pairs will follow the same trend. Positive correlation means that when the longs control the market, both currency pairs will follow similar trends. The opposite should happen. A downtrend in one currency pair should also be observed in the other pair. The trend of one currency pair mirrors the trend of the other.
Why is correlation so important for Forex trading? Understanding how correlation affects your lot size is key. Trading two currency pairs with a negative correlation is a waste of time. The profits from the two trades will cancel each other out. However, opening two trades with a positive correlation is the same as double trading. Overtrading can lead to significant losses and you can lose a large amount of your account.
Correlation Indicator
The correlation indicator shows the price movements of two currency pairs that are correlated to each other. The correlation indicator shows you information about the market behavior of two related currency pairs. This allows you to more accurately pick turning points in the market. This indicator is an excellent tool for identifying trading opportunities in the market.
How to use the Correlation Indexer
The correlation indicator itself does not generate buy or sell signals. It superimposes a second currency pair on the price chart. This means that you can see the price movements of the currency pair shown on the chart and the indicator. You can then watch the market unfold candlestick by candlestick in both currency pairs.
How do you use the indicator to open Buy and/or Sell indicators? If the currencies are positively correlated, they should show the same trend. If two positively correlated currencies show a trend difference, this is a trading opportunity. You can profit by buying or selling one of the currencies, as the price will soon follow the same direction.
Summing up
The MT4 correlation indicator is very useful for predicting the future trend of positively and negatively correlated currency pairs. Positively correlated pairs will eventually follow the same price trend, while negatively correlated pairs will follow a different path. If this rule is broken, trading opportunities may arise. The indicator is not a simple buy or sell signal, so it is best used in conjunction with other tools.
