Financial markets rarely move in isolation. A trend in one asset will often ripple around several others, meaning some prices rise as others fall.

This effect is called market correlation. While it can be useful for spotting opportunities, it can also increase your risk if you aren’t careful. But by understanding how correlation works in forex trading, you can take a significant step towards lowering your overall risk.

• What is market correlation?
• Types of correlations
• Example of currency correlation
• Which currency pairs are correlated?
• Why correlations are important
• Commodity correlations
• Correlation between currencies and stocks
• Currency correlation: Trading tips

What is market correlation?

Market correlation is a measure of how much assets move in line with each other. You can measure the correlation of specific markets, industries or entire asset classes. That being said, it should also be noted that there is no guarantee that the two will be or likely to be correlated in the future.

Correlation is usually measured as a percentage. If two markets are 100% correlated, then their movements will always be the same. When one rises, so will the other. This is called a perfect correlation.

A 50% correlation, meanwhile, means that the two markets generally move in the same direction but may not always follow each other in lockstep.

Types of correlations

There are three types of correlation:

• Positive correlation describes markets that mimic each other's movements
• Negative correlation describes markets with inverse movements
• No correlation describes markets with no relation whatsoever