EURUSD: Using Correlations in Your Trades

The euro is definitely deserving of its nickname of the anti-dollar. The market never seems to favor both at the same time. So the question you must ask yourself as well is: Is time to sell the dollar? To do this I will look at USDCHF as it correlates to EURUSD (EURUSD and USDCHF have a historically strong negative correlation). Now, I am not suggesting a correlated trade, but rather looking at a correlated currency pair to give you a different perspective.

Take a look at EURUSD on a H1 timeframe. Originally I saw two consecutively broken triangles with momentum moving up, so I looked to USDCHF to see if I could see a similar movement. This confirmed what I saw in EURUSD with one exception; USDCHF was traveling in a downward channel and was nearing the bottom. So I looked back to EURUSD and saw this channel as well and it was nearing the top of its channel.

Looking at USDCHF told me two important things. First, that EURUSD was moving in a channel, and that this was not an optimal time to buy. Optimally you should wait until EURUSD is at the top of its channel (USDCHF will be at the bottom of its channel) before you buy it. This gives you a better price and puts EURUSD closer to support giving you a higher potential for profit.

In the chart below I have marked what I originally saw in red, and what USDCHF helped me see in blue.

Traders often times look to correlations in order to attempt to make some kind of hedge that will guarantee profit. This is not the purpose of studying correlations. What correlations do is give you a different perspective on a currency pair that will show you what you didn’t see in the original pair. Remember that without potential for loss there is not potential for profit.