If you’ve been around markets long enough, you’ve probably heard traders say:
“Gold and silver move together.”
“When USD goes up, stocks go down.”
“Oil and CAD are basically the same trade.”
That’s great, but often correlation isn’t constant, and understanding when it matters can be the difference between catching the move or not.
What Is Correlation (in Real Terms)?
Correlation simply measures how closely two markets move together.
A positive correlation means they move in the same direction (e.g. EUR/USD and GBP/USD).
A negative correlation means they move in opposite directions (e.g. USD/JPY and Gold, most of the time).
Sounds simple enough, but correlations shift depending on fundamentals, risk sentiment, and macro trends.
If you trade multiple pairs without paying attention to correlation, you might think you’re diversifying but in reality you’re trading the same action.
My Trade: Gold and Silver
When gold broke out last year I for one was not on the rally. My strategy didn’t give me any entries as it was pretty much a straight line move.
I thought to myself, if I can’t buy gold what can I buy?
Historically gold and silver move together and silver tends to lag gold, but it often follows.
Using the gold/silver ratio chart I could find strong entry points on silver.
When the gold/silver ratio hits a high point, we tend to see a bottom form in silver prices.
So by understanding correlation and this ratio I bought silver instead of gold.
I used correlation to form my idea, and the ratio to confirm some of my entries.
Common Correlations to Watch
Here are a few correlations that retail traders should have on their radar:
Oil and the Canadian Dollar (CAD)
Canada is a major oil exporter.
When oil prices rise, CAD often strengthens because of higher export revenues.
When oil falls (like it is now), CAD tends to weaken.
If you can combine this with a macro backing then you could use the correlation to identify better opportunitiesl.
Gold and AUD/USD (not working currently)
Australia exports gold, so AUD/USD tends to move in the same direction as gold.
This hasn’t been a thing since 2018. But before that the correlation lasted 10 years.
So it can be there but, this is a great example of checking first.
Stock Markets and USD/JPY
During “risk-on” periods (when traders are confident), USD/JPY tends to rise as money flows into equities and away from the safe-haven yen.
When fear spikes, the yen strengthens and USD/JPY falls, classic risk-off behavior.
EUR/USD and GBP/USD
These pairs are positively correlated because both are traded against the U.S. dollar.
If USD is strong, both typically fall.
If USD weakens, both usually rally.
The key? Don’t double your exposure unknowingly. If you’re long both, you’re effectively short the dollar twice.
Remember This
Correlation matters in two key situations:
When Managing Risk: If two trades are highly correlated, treat them as one position.
When Finding Confirmation: If your trade aligns with correlated assets (e.g. gold and silver both turning higher), it strengthens your bias.
But remember, correlations break down.
That’s usually a signal that something fundamental is shifting in the market.