Hi traders!
Trading highly correlated forex pairs, such as CADJPY, EURJPY, and AUDJPY, can offer several advantages for traders. These pairs often exhibit similar price movements, which can make it easier to identify and capitalize on trends. Additionally, highly correlated pairs may enable traders to apply a single, effective trading strategy across multiple currency pairs, saving time and effort in analysis and trade execution. This can also allow for diversification within a trader’s portfolio, as they can spread their risk across several correlated pairs, increasing potential returns.
On the flip side, trading highly correlated forex pairs also has its drawbacks. The very nature of their correlation means that they tend to move in the same direction, which can lead to concentrated risk in a trader’s portfolio. If the market moves against their positions, losses can be magnified across all correlated pairs. Also, highly correlated pairs may sometimes experience periods of divergence, causing confusion and posing challenges for traders relying on their usual strategies. Lastly, strong correlation between these pairs can create a false sense of diversification, as they’re exposed to similar market forces, resulting in a less balanced portfolio than initially anticipated.
Traders should think of it like this:
Highly correlated means that the central asset causing the correlation is clearly moving, thereby offering potentially safer (higher probability) moves, which is good.
The risk is concentrated, but this can be offset by reducing the allocated risk (budget for each trade).
Some traders prefer to pick one of the bunch, and only trade the one they feel is the strongest setup.
My personal view, from experience, is that I would rather get a piece of each one, as the moves once they are completed, don’t always show their full potential at the start.
Take a gander at the following Daily JPY charts – just eyeballing it, but there appears to be a strong visual correlation and bullish sentiment across these pairs:
Happy Trading!
