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CORRELATION COEFFICIENTS on FOREXHello everybody! Professionals have been aware of correlation for a long time and use it profitably. The essence of correlation is not difficult to understand and using it in trading can significantly increase your profit. Correlation coefficient of currency pairs – what is it? Correlation is a statistical relationship between two or more random variables. The correlation coefficient is an index of the interdependence of quotations of different currency pairs. Correlation of currency pairs is divided into two types: direct (positive) and inverse (mirror or negative). A positive correlation is a similar movement of quotations of different currency pairs. Inverse correlation is the reverse movement of the exchange rate of different currency pairs. For example , EUR/USD and USD/CHF are in a mirror correlation because both European currencies are against the dollar. Any change in the euro affects the franc exchange rate and vice versa, on the chart, the price of the euro and the pound moves the other way around because in the EUR/USD pair, the dollar is in second place, and in USD/CHF in the first. Method Analysts have come up with a method that makes it easier to understand the correlation, it is called the correlation coefficient. Using it, you can understand in which range each pair is relative to the other, where +1 is a complete correlation, and -1 is the opposite. The stronger the link between the economies, the stronger the value tends to unity. Let's consider the main ranges of coefficient values and their impact on the currency pair: • 1 - Denotes the same movement of currency pairs. * From 0.9 to 0.5 – High dependence of currency pairs among themselves. * From 0.5 to 0.1 – There is a decrease in correlation. * 0 – There is no correlation, the instruments do not depend on each other. * From 0.1 to -0.5 - Characterized by a decrease in correlation. * From 0.5 to -0.9 – An increase in correlation and a change in the direction of movement of currency pairs in the opposite direction. * -1 – Inverse dependence of currency pairs. One price is going down, the other is going up. Trading options Novice traders often think that they reduce risks when they invest in different currency pairs, but at the same time they do not understand that a large number of pairs correlate with each other. Forgetting about the correlation, you can start getting double losses. Correlations can be used to confirm signals. For example , the analysis of the EUR/USD chart showed growth. To make sure that the forecast is correct, you need to get a reverse confirmation for USD/CHF. Sometimes, to confirm trading signals, a comparison of three assets that are minimally related to each other is used. Take for example EUR/USD, USD/JPY and EUR/JPY. • If EUR/USD is predicted to go up, then the forecast for the reverse currency pair USD/JPY should signal a fall. In the event that there is no signal for USD/JPY, then it is necessary to carefully study the behavior of EUR/JPY. No matter what tactics a trader uses, you always need to remember about correlation and use several pairs with positive and negative correlation in the analysis to increase the accuracy of the forecast. In addition, correlation helps to hedge transactions. Having decided to invest in one currency pair, you can divide the investment amount into two parts and invest the second part in a currency pair with Time interval in correlation analysis The correlation has the ability to change depending on time. It may be that the daily correlation = 0.6, but when switching to a monthly interval, this value increases and shows a strong correlation. There may be an inverse situation, when the correlation drops relative to the selected interval. Pay attention to this when analyzing. Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I will be glad 👩💻
Education
by Lingrid
16
ACCOUNT DRAWDOWN – HOW TO AVOID IT?Today I want to touch on a very important topic - account drawdown. Every trader will face this problem sooner or later, because losses in the forex market are inevitable. And if a professional knows what to do and has experience dealing with such a problem, then beginners often get lost when faced with a drawdown, which leads to even greater losses. What is a Margin Call? Margin Call - is a "call"-notification of the broker with a requirement to deposit additional funds to guarantee open transactions. If no additional funds have been received to the trading account after the Margin Call, and losses continue to grow, then when the price reaches a certain value, the Stop Out procedure will be launched, and the brokerage company will automatically close part, and possibly all transactions on the trading account. Causes of drawdown. There are two possible reasons. The first reason for the drawdown is a bad trading strategy. Each strategy needs to be checked and only then use it. No risk management will help if the strategy is unprofitable. The second reason is psychology. Even if you have a proven strategy, you can still lose money because you lose control of the situation. Discipline is the key to profitable trading. To act according to the strategy and even after a series of losses to adhere to the plan and not exceed the value of risk management - that's what a professional does and a beginner misses. Newcomers try to regain what they have lost by opening deals with a large volume, risking even more money, driving themselves into an even greater minus. First of all, you need to put up with losses, it is impossible to avoid them! Accept losses, do not lose your head, trade further according to the rules and then you will not only return, but also earn even more money. An important thought! Every beginner should remember that the more he loses, the more he will need to make profits in the future in order to reach zero. It is very difficult to make 50% of the profit to the capital in one transaction. It is almost impossible to make 100%, but beginners do not understand this and invest a lot of money, open positions with a large volume and lose even more. Losing 1% is not so scary, losing 10% you need to do 11% already to get to zero. Having lost 50% in the future, you will need to make 100% to go to zero! Don't bring your account to this. Remember: it's better to move up slowly than to fall down quickly and crash. Decide on the drawdown level. Professionals do not let their account fall below reasonable values. A beginner brings his account to exhaustion in two or three transactions. For a beginner, a drawdown of -50% or -70% occurs easily and quickly, a professional cannot afford this. Each trader must decide for himself how much percent of the capital he can lose and still remain calm. For each person, these values are different, someone cannot survive a 20% drop in the bill, and someone lives quietly with -50%. Drawdown levels up to 15% – normal working drawdown. 16-30% is not a reason to panic, but the time is coming to reduce the risks and intensity of trading. And it is also worth reviewing the state, dynamics of the market and the trading instrument. 31 - 60% is the beginning of the end. If the account is down by more than 30%, trading should be stopped and a break should be taken. After that, come back with a modified strategy for making trading decisions. Drawdown is an unpleasant thing, but the main thing is not to start it and not to delay the time after exiting it. If you have already fallen into a drawdown, then you need to follow the following rules: If you use a proven trading strategy that has repeatedly made a profit, then you just need to fix losses and continue trading using the same strategy, but with a more gentle money management system. If the trading strategy used is no longer effective, then you should fix the losses and look for a new working trading system. Due to the fact that there are no exceptionally accurate methods to exit the drawdown, your further actions will be reduced to the same trade. In this situation, the trader should identify weaknesses in his strategy and try to eliminate them. The revision of approaches to risk management and funds will also allow you to balance trading and avoid deep drawdowns in the future. Be disciplined, follow the money management, trade systematically, and the drawdown on the deposit will not bother you. ------------------- Share your opinion in the comments and support the idea with Like. Thanks for your support!
Education
by DeGRAM
6
DeGRAM | EURUSD forecast for the week. Long to 1.142The currency pair makes a false breakout of the strong downward support and, after testing the 1.117 support, returns to the 1.13 level. The weekly session closes higher, I think that this is a possible start of the price recovery. If the instrument consolidates above the level of 1.13, then I expect the price to rise to the resistance of 1.142 ------------------- Share your opinion in the comments and support the idea with Like. Thanks for your support!
Long
by DeGRAM
2
PRINCIPLES OF DRAWING UP A TRADING PLANHello traders! Today we will talk about WHAT should be in the trading plan of any self-respecting trader. Many, as it turned out, do not know the basic principles of building a trading plan. This article will help beginners understand WHAT should be added to their trading arsenal. 1. Timeframe. The first stage of drawing up a trading plan is to determine the timeframe. Every trader should know in what time interval he is going to look for entry opportunities and build a trading strategy accordingly. As a rule, timeframes are divided into three types: 2. Risk management. Risk control is probably the most important issue in any trading plan. The ability to control risks and follow principles distinguishes a professional from a beginner. In this section, the best rule is rule 1-3% 3. Market structure. Every trader should have a trading strategy even before opening a position during periods when the market is trending or in a sideways movement and, of course, be able to correctly determine when the market is moving from one phase to another. 4. Markets. Each market has its own characteristics. Not every trader, for example, can approach the forex market. You need to know where you are trading and use the appropriate tools. It may be worth trying all the markets to understand what is right for you. Study the markets, gain experience. 5. Entry conditions. The entry point must be chosen by the trader according to the rules prescribed in the strategy. A trader should know when and under what conditions to enter a position. Strategies can be different: based on a pullback or a breakout of the level, or maybe you want to trade according to the intersection of the indicator lines. And, yes, no one forbids using all strategies at once, the main thing is not to get confused. 6. Stops. Placing stops is an important part of the strategy. A properly placed stop can protect you from premature closing of the transaction. Failure to place a stop order may result in the loss of all capital. In any case, the strategy of placing stops should be in every trading plan. You can set a stop according to some percentage you have chosen, or you can set a stop for the maximum or minimum, it's up to you, but you need to decide before entering the position. 7. Target. A correctly set goal and a set take profit helps a trader to take profit and not stay in a position until it turns from profitable to unprofitable. There are different ways to fix profits: fixed - the value you have chosen according to your trading strategy. Trailing stop is a slightly advanced method, the essence of which is that the stop will move along with the price at the distance you choose and will close when the price goes against you too much. Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I will be glad 👩💻
Education
by Lingrid
37
Principles Of Risk Management One of the main topics, and perhaps the most important, is the topic of risk management and risk reward. Beginners often do not take this topic seriously, trying to hit the jackpot in every transaction, risking all or almost all of the capital and not realizing what the consequences of such actions may be. Whatever trading style you use, whether it's day trading or scalping, the way you manage risk will still be decisive in the question of whether you will be profitable at a distance or not. Margin trading gives a lot of advantages, but most often it ruins newcomers who open deals with a large volume and quickly lose money when the price goes against them. The ability to manage risks correctly will help you stay in the game for a long time and be profitable at a distance. Focus on protecting what you have. In the pursuit of profit, traders forget about risks, forget about capital protection. It is important to remember that after each loss, the percentage of profit that needs to be returned to breakeven increases exponentially, depending on how much you lose. Fundamentals of Risk Management The market is changing every second and at any moment there may be news that will make the price go against you. The desire to risk everything in one transaction leads to the closure of novice accounts, instead, it is better to manage risks and stay in the game for a long time, making a profit. Anything can happen in the markets and it is simply unwise to risk everything in one transaction. You must remember: 1. You should not risk more than you can afford to lose. 2. Each trade must be opened with the correct risk reward ratio. (RRR) The Risk Reward Ratio (RRR) is how much you are willing to lose, compared to the expected profit in each trade. You should strive for a ratio of less risk / more profit. One of the best ways to manage risk is the 1% method. This method of risk control means that in each transaction a trader risks 1% of his capital. This is correctly used even by managers of large hedge funds and they do it for a reason. Do not think that only 1% of the capital can be traded. You can use at least all your capital for trading, but your stop loss should be no more than 1% - this is your risk. You can use leverage if you need to, but don't lose more than 1% in one trade if you want to become a professional. The Best Risk-Reward Ratio For Trading Before opening a position, you should know how much you can lose and how much you expect to win, and the ratio should not be lower than 1:1. A ratio below 1:1 means that you lose more than you can win, and this is an extremely dangerous activity that can eventually lead to the loss of the entire account. If the ratio is 1:1, you will be at breakeven, even if 50% of your trades are unprofitable. If the ratio is higher than 1:1, then you will be in the black, even if more than half of your trades are closed in the negative. Do not forget that it is impossible to win in every transaction and without proper risk management, such a game will lead to big losses. Do not forget about the rules of risk management, use a profitable strategy and act according to the rules, do not give in to emotions and then success awaits you. ------------------- Share your opinion in the comments and support the idea with Like. Thanks for your support!
Education
by DeGRAM
1