The FX AlgoTrader Real Time Correlation indicator for MetaTrader MT4 provides a real time correlation chart for forex pairs which is updated in real time within the MetaTrader MT4 environment. The indicator sources it's data directly from the client terminal and provides a Pearson correlation coefficient for each set of forex pairs.
Using Correlation in Currency Trading
Understanding sensitivity to market volatility is important particularly when trading forex. Currencies are priced in pairs and no single pair trades completely independently of others.
Correlation Defined
Currency pairs are derivatives of other pairs. For example, the GBPJPY (British Pound/Japanes Yen) is a derivative of GBPUSD and USDJPY. Therefore, GBPJPY is somwhat correlated to one, if not both of these other currency pairs. Some currency pairs move in tandem (positive correlatation) and other currency pairs move in opposite directions (negatively correlated).
Correlation, is the statistical measurement of the relationship between two assets. The Pearson correlation coefficient ranges between -1 and +1. Therefore, a correlation of +1 means the two assets move in the same direction 100% of the time whearas a correlation of -1 means the two assets move in opposite directions 100% of the time. A correlation of zero indicates there is no correlation between the two assets ie their prices move in completely unconnected ways in relationship to each other.
Correlation Changes
Sentiment and global economic factors are very dynamic and can change very quickly. It's important to look at the longer term correlations to gain a clearer perspective of the long term relationship between the two currency pairs. Correlations change for a variety of reasons, the most common of which include diverging monetary policies, a certain currency pair's sensitivity to commodity prices, as well as unique economic and political factors.