Discussion in 'Risk Management' started by erensenez, Feb 15, 2019.
Is forex correlation helpful to risk management?
I don't know what you meant.
what is forex correlation?
Correlation, in the financial world, is the statistical measure of the relationship between two securities - https://www.investopedia.com/trading/using-currency-correlations-advantage/
I don't think it does. Risk Management is a different thing entirely. Currency correlation is like a different strategy entirely that might maximize profit, but risk management is entirely up to you in whatever strategy you use. I use Forexchief broker; they offer up to 1:400 leverage even for stocks, but that does not mean I have to use up to that. My risk management rule states that I must not use too much leverage.
Correlation is a statistical measure and is highly relevant to both strategy and risk management. Very casually explained, if something you hold is highly correlated with something else you hold, diversification means zilch because your losses tend to happen at the same time, as the two positions tend to move the same. Such a behavior is also the basis for many trading strategies.
Not ever trading forex, I can assume that taking a position in US/EUR and US/CAD at the same time on a similar pattern would not be a good idea. Your position would be twice your expected risk/size.
Run into similar issues in stocks. Gold miners as an example are highly correlated to gold and most the time if I see a pullback I want to enter, its quite similar on most the other gold miners. Usually just as easy to trade gold or a gold miner ETF and eliminate some of the risk of an individual stock.
THanks everybody, really help me a lot to understand
Forex correlation and Risk Management are not completely related to each other. However,they form a basis of a statistically high profitability forex trading. They can show the amount of risk you are exposed to in your forex trading.
For instance,if you have bought several currency pairs with a strong positive correlation then you are exposed greater directional risk.
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