I want to make sure I understand the UN-COREELATION on two different Forex pairs please: So so long as the Two Pairs are nearly 100% Un-Correlated , can you still profit from the two pairs , via being Long one and short the other ? Since they are nearly to 100% Un-Correlated, this seems to make sense ? Thank you for the help
It would mean any profit would be mere luck IMO. If they are 100% non-correlated, they move at complete randomness... if you would enter into a long-short trade, it means you think one would move up compared to the other, right? So... if you believe that one is cheap compared to the other you apply some sort of correlation... since you compare it. There's no point comparing 2 complete non-correlated assets. That would be like saying the price of apples is going up compared to bags of cement.... you might be right, but it doesn't make any sense to do some kind of comparison. But I don't think currency pairs are 100% non-correlated anyway... they all more or less work in the same world of interest rates and country/government reliability and trust. I guess some are more correlated than others.. but all are correlated. Which pairs are you looking at?
most fx flows are dollar driven. place jypusd eurusd gbpusd cadusd chfusd audusd nzdusd charts all on one screen & you will notice the longer term direction is mostly the same. in the shorter term, moves in minors are still tradable, when they move in opposing directions. eg. cadusd moving up + jpyusd moving down = long cadjpy this is the nature of dollar being the world's reserve currency after ww2. alot of trades in the world are done in US dollars. commodities, oil, even bonds issued by some countries are dollar denominated. if you need something, you need dolloars. if you sell something, you get dollars I trade mostly off technicals & correl is just to check I'm looking at a good trade. eg. if I wanna long cadjpy, I will check that cadusd is also looking strong before I execute the trade. a long cadjpy trade is a long cad + short jpy & zero usd exposure trade
I did some simple market monitoring a while back to establish just this sort of question - do pairs with different currencies move in similar ways? My answer was that either most pairs move with their prevailing trends over a given week, or most pairs go counter-trend. But the point is they all move in step and for most pairs, no real reason was visible. The reasoning for this I suppose is that if the big players are buying major currency A, they are pulling money in from other currencies, not just B and C, but also X, Y and Z. Everything is correlated in some way to every other pair.
You are confusing application of the Markowitz model, which do say that if you invest in stocks (where you have expected dividend) and the number of stocks in your portfolio increases to n then variance (i.e. risk) of your portfolio converge to covariance. If correlation between stocks are 0 then covariance is 0 too what means you build risk-free portfolio. In short: currencies have no expected return, i.e. this model is not applicable to forex