Published On: Wed, Dec 26th, 2012

Improving your forex trading using advanced techniques


1.   The Power of Correlation

Correlation is used to express a mutual relation between two random entities. If two currency pairs, such as the GBPUSD and the EURUSD, exhibit positive correlation then this means that they are moving in the same direction. In contrast, negative correlation implies that they are advancing in opposite directions.

You must understand that the correlation between two pairs can alter over time in order to exploit its full benefits. For example, although the GBP/USD and the EUR/USD could have displayed positive correlation for the last 6 months, this pattern could alter quickly in a very short space of time. This could be caused by fundamental or political events such as changes in the economic climate of one of the host countries.

For instance, envisage that Great Britain had instigated a sharp adjustment to its monetary policy which increased the likelihood of a reduction in its interest rates. Such a development could make Forex investors rapidly minimize their risk exposure by selling-off the British pound. Such moves would then also directly impact the correlation between the GBP/USD and EUR/USD currency pairs. Consequently, if you gain an appreciation of correlation then you will be able to manage your Forex portfolio much better.

The most important reason for doing so is that analyzing correlation will improve your ability to control your risk exposure. For instance, you must understand that trading a combination of EUR/USD and NZD/USD involves a different level of risk exposure compared to one involving the EUR/USD and USD/CHF.

You will also discover that there is a pronounced correlation between the Stock Markets and Forex, which you can readily exploit to produce profits. For instance when the Dow Jones Index falls, then the low-yielding US dollar will rise in value against other currencies as traders seek safe-haven options.

In contrast, if the Dow Jones Index rallies strongly then the USD dollar will be sold off amid improving risk appetite. As such, you cannot only use correlation to help you forecast the future movements of currency pairs but you can also utilize it to hedge your bets.

2.   Trading Forex in Real-time

You are advised to attain access to 24-hour streaming news and expert commentary produced by revered professional sites, such as Reuters. Most leading Forex brokers will also readily supply you with such facilities. You will then have the ability to monitor all major economic, political and Forex developments around the world. Such information will supply you with a constantly updated overview that you can use to help you forecast the future movements of currency pairs. As such, you will be able to make better informed Forex trading decisions.

Expert consensus recommends that you should enlist with a Forex broker who has the ability to supply you with real-time charting, news and commentary as well as live Forex rates. This is because you can then utilize these facilities to respond rapidly to all new worldwide developments as they occur. Consequently, you will then be able to assess each event in a more professional manner and make quality decisions accordingly.

In addition, you will be able to monitor your open Forex trading positions and evaluate how they are reacting to fundamental events in real time. For instance, every time a major nation adjusts its interest rate then you must quickly determine the ensuing impacts on all your active trades immediately. In order to make the appropriate response to such important developments, you must always possess a full understanding of your precise total equity, used and useable margins.

You should also register with a broker who will permit you to trade straight form live charts. You will then be able to transmit your orders directly from the trading charts of all those currency pairs you intend to trade. You must also possess the ability to save important tools, such as templates charts and multiple layouts, etc.

Advanced tools, such as correlation, live commentary and direct charts, can help you trade more proficiently in real-time. This is because you will then be able to assess and execute orders more rapidly and accurately.

Your charting package must enable you to study your positions using technical analysis including technical indicators such as pivot points, moving averages and Fibonacci lines, etc. By providing such facilities, your Forex broker is permitting you to detect future trading opportunities by supplying you with a visual display of all your open positions and pending orders.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.