This Overlooked Strategy Helped Me Catch Moves Other Traders Missed

Hey traders! One of the most underrated tools in a retail traders toolkit is correlation analysis. 

I personally use correlation analysis all the time. I find it can help me spot hidden opportunities especially when we see some outliers in the markets. 

If you’ve ever wondered how you can use relationships between positive and negative correlated assets to stop opportunities, then stick around. 

1. Understand what currency correlation means

This is super simple to understand, a positive correlation means two or more assets tend to move in the same direction. This can happen for multiple reasons, they trade in similar markets, or they can be sentiment driven. Whatever it is, there’s usually an underlying reason to why they are correlated. 

Negative correlation means two assets typically move in opposite directions. For example, the Canadian dollar (CAD) often has a positive correlation with oil prices, since Canada is a major oil exporter. On the other hand, the Japanese yen (JPY) tends to have a negative correlation with oil, because Japan imports most of its oil, so rising oil prices can weigh on the yen.

2. How to identify highly correlated assets

Lucky for us people have developed tools that do all the information for us. Myfxbook has a handy tool and it can be found here. 

It compares currencies and other markets together and gives us a percentage, the higher the percentage the stronger the correlation. The more negative the percentage, the weaker the correlation. 

When clicking into an asset we get a different format.

On the left hand side we get the top absolute correlation, here we can see the most positive and most negative correlations. For example AUDJPY has a strong correlation with NZDJPY and a negative correlation with EURAUD. 

3. Spot divergences

Using this as an example, we can watch the price action of the assets in question. 

Let’s say the AUDJPY price rallies significantly, without any news drivers, but NZDJPY remains subdued. We could look for the NZDJPY to catch up with the AUDJPY price.

This can happen all the time, one of my favourite correlations to use was the US10Y vs the USDJPY. This held a very strong correlation and could be used for day trading and swing trading opportunities. That was until recently when the US bond vigilantes came into the markets.

That is one thing about trading correlations. You have to be aware that correlation can split from time to time, so it’s important to use a correlation tool regularly to understand what markets are closely trading. 

Final thoughts

Using correlations to identify lagging forex pairs is a smart, data-backed way to spot opportunities others might miss. But remember, it’s not foolproof. Combine it with solid risk management and technical confirmation for the best results.