Currency correlation measures the extent to which one currency pair mimics the moves of other currency pairs. If two pairs tend to move in the same direction, they are positively correlated. If they tend to move in opposite directions, then they have an inverse correlation.
Traders need to be aware of these correlations, because being ignorant can cause you to overexpose your trading account. For example, entering a long trade on the EUR/USD and the NZD/USD, is, in essence, entering two short trades on the US dollar. There isn’t anything inherently wrong with entering two trades involving one currency, but you must be aware of any double exposure.
Remember, diversification is the cornerstone of good money management. Research the correlation between the pairs you decide to trade, so you don’t overexpose your trading account. www.Mataf.net has an excellent currency correlation table you might find useful for this purpose.
Volatility and Trading Range
Being aware of the daily trading range of a pair is essential, because it will help you to set appropriate stop loss and take profit targets. For those who like to see large moves, you can consider trading the GBP/USD, as it tends to average well over 200 pips on a daily basis. However, if you are new to forex, start with less volatile pairs, such as the EUR/USD or EUR/GBP.
Be advised, all currency pairs don’t have the same pip value. As an example, a one-pip move in the EUR/GBP will translate into more money than would a similar move in the GBP/JPY.
If trading highly correlated pairs can cause an overexposure, then the reverse is true; trading two similar currency pairs can provide hedging protection. Hedging is a trading strategy that seeks to offset the exposure to loss in one instrument, be entering an opposing trade on another instrument. For example, entering a long trade on the EUR/JPY and at the same time, a short trade on the CHF/JPY, would in essence be edging against moves in the Japanese (Yen).
As a result of new regulations in the US, traders can’t have a long and a short trade position consecutively, in the same trading account. However, traders may work around this rule by using a sub-account to enter an opposing trade on the same pair, or open an opposing trade with a pair that has an inverse correlation to the first.