How to use the Currency Correlation technique?

One of the most important things that a trader needs to understand your USD bias and how to use the currency correlation technique. Are you aware of these? Read on to get the insights on how to determine your USD Bias and the use of the technique.

22 August AtoZForex - One of the most important thing as a currency trader is to understand the strength and weakness of the USD. Understanding USD bias is a must for all traders and you must understand your USD bias. There are those that only trade the majors pairs. Why? Read on for the valuable forex trading tip and learn the use of currency correlations.

What is your USD bias?

You do not know your USD bias? Then read on for yet another forex trading tip.

How to determine USD bias?

You simply look at the US dollar index, work out if the US dollar is likely to strength or weaken according to your own analysis. Then simply apply this bias to the currency pair you are planning to trade. Check which side of the equation is the USD is sitting on the planned currency pair (Don’t forget you BUY the first currency and SELL the other currency).

Here is an example

Let us assume according to your analysis that the US dollar will strengthen, which means you will be BUYING (or bullish) on the US dollar. In your trade plan you have decided that you will only trade the following three currency pairs.

1. EURUSD – remember USD bias is to buy, hence on EURUSD you would be SELLING

2. GBPUSD - remember USD bias is to buy, hence on GBPUSD you would be SELLING

3. USDCAD - remember USD bias is to buy, hence on USDCAD you would be BUYING

See also: Should Forex Education be free?

This shows you are trading in accordance with your USD bias analysis. In other words, you are LONG (or bullish) USD and SHORT (or bearish) the other currencies.  A single bias, however three trades!

Hint: Remember that each currency pair will respond differently to the USD.

Currency Correlation - Forex trading tip

Let us assume that your bias on the USD is bearish. This means you can go LONG on EURUSD or GBPUSD. However your trading plan only allows you to trade either the EURUSD or GBPUSD. Which one do you trade?

Hint: Look at the EURGBP and analyze which is stronger the EUR or GBP? If EURGBP is bearish then go LONG GBPUSD or if EURGBP is bullish then go LONG on EURUSD.

Most of the time (not 100%) the majors all move predictably in one direction or another dependent on the strength or weakness of the US dollar.

Hope you enjoyed reading this article. Do you have any questions or feedback? Let us know down in the comments section.

Leave a Reply

Your email address will not be published. Required fields are marked *