Correlated Forex pairs: EURUSD or GBPUSD and how to trade them
There are times when you will look at 2 different currency pair charts only to see that they are quite identical. This has happened to me several times when comparing pairs such as EURUSD with GBPUSD.
First of all, these pairs are correlated in how their prices move. This means that the chart for EURUSD will almost always form a pattern that is similar to that of the GBPUSD. These 2 charts generally tend to move in the same direction, although it is never exact.
The only difference here is that GBPUSD tends to be more volatile than its EURUSD counterpart. However, when EURUSD is in an obvious up or downward trend, then it is safe to assume that GBPUSD is doing the same exact thing. That’s why we say that these 2 currency pairs are positively correlated.
But what’s the meaning of this correlation between EURUSD and GBPUSD?
Well, it means you should practice extreme caution when entering trades which also involve these two pairs. If you are trading EURUSD for instance and you wish to open a second position for the GBPUSD, you run a significant risk of doubling your risk or trading against your current position with the EURUSD.
Doubling your risk is essentially a very dangerous way to trade the Forex market. Furthermore, I generally don’t see the need to trade both charts if all of them are doing the same thing…… like forming the same price action patterns. I generally pick the pair whose trade setup looks more defined, then I ignore the other.
Similarly, a long position on the EURUSD and another long one for USDCHF (all opened at the same time) will do more harm to your account than good. This is because the two pairs are negatively correlated. When one is moving upwards, the other one will always move downwards. If you take the two trades simultaneously anyways, you will break even at the very least… which is something we do not want to do consistently since we are looking for profits when trading the Forex market.
First off, USDCHF tends to be very choppy when you compare it to the other two currency pairs. And I generally want to avoid choppy markets which aren’t very predictable.
In other words, if I want to trade the European markets against the US dollar because better signals are manifesting in any particular day, I will go for EURUSD or GBPUSD instead.
Obviously this is not to say that traders must not use USDCHF. It’s just a matter of personal preference. All I know is that the other currency pairs tend to form solid price action signals compared to the USDCHF pair.
Reasons why you might want to put more focus on the EURUSD as the best pair to trade
Because EURUSD is the most widely traded pair in the Forex market, it is also the most liquid of all. It carries the largest volume of transactions per day. That is reason enough to want to trade it as opposed to its other correlated brothers.
According to some stats, the EURUSD takes up 27% of the Forex market volume in transactions. This is followed by USDJPY at 13% and GBPUSD at 12%.