Understanding Correlation

by Ashley DeSousa | Jun 18, 2025 | Forex Analysis

Understanding Correlation

I thought to write an an article to give you some tips on how to understand correlation and avoid taking silly loses.

I use the website below to track correlation for the pairs I trade, the correlation between pairs can change in certain months during the year. This is understandable as the fundamentals can change which leads to some currency pairs going in a different direction for a certain period and then eventually catch up later.

Mataf correlation

Some of the most common correlations are EURUSD vs. USDCHF, AUDUSD and AUDCAD, GBPNZD vs. NZDUSD, AUDUSD and NZDUSD, and many more combinations. It is crucial to know the correlations of the currency pairs you trade.

I learned many new things during my first couple of years in trading. I used to take 3 or 4 positions at a single time. Have you ever been in the position where you are in 3 or 4 trades at a single time and 1 or 2 of them are going in your direction and the other 2 go the opposite way? basically making the week for you breakeven or worse a losing week. It took me a while to realise that the more positions I take at one time the higher the chances are that the other trades are somewhat correlated to each other. Hence, in the past couple of years, according to my trading rules, I only try to be in 2 positions at a single time, and that has rarely been the case, as I mostly tend to focus on 1 pair at a single time. If that loses then I go on to the next one.

I also have a rule that I halve my risk if I take two positions similar to EURUSD and GBPUSD. But in the past year, I stopped doing that. As in, I don’t take two correlated trades at a single time by halving the risk. This is because I would rather focus on one pair that looks better among the two. Firstly, I would go full risk on the pair that I like the most, and secondly, it saves me the hassle of managing two trades in case there is news due on one of them. That way I can give my full attention to the best pair that looks clean for the week ahead.

I explain in the short video below in a little more detail:

Kind regards,

Ashley

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