Stock Market

Don’t leverage involuntarily on corelated currency pairs for FX:USDCAD by MariusStanescu

Many beginner traders are getting excited when they see their setup developing over multiple currency pairs, but their are ending up leveraging involuntarily on what I called false setups, because these setups are developing on multiple similar assets, or corelated assets.

For example, in top left there is USDEUR (or mirrored EURUSD ) and top right of the chart, you can see USDCAD . Extremely corelated.

In the down left is EURUSD and, in the right down you side, you can see NZDUSD . Extremely corelated.

I want you to notice the similarity on how the price is moving on all 4 charts, because if you spot your setup on NZDUSD EURUSD USDCAD , you have similar chances to get SL or TP hit on all 3 instruments. So not not get fooled by spotting your edge on 3 multiple instruments, because actually you are leveraging your position and six multiplied by 3.

This is how I choose on what instruments to place trades if I spot my setup on multiple corelated pairs.

AUDUSD GBPUSD EURUSD NZDUSD USDCAD USDJPY

The above instrumented are highly corelated or influenced by USD supply or demand. In order to choose what is the best to trade, try to include fundamentals to your decisions, like follows:

AUD- this currency is influenced by GOLD price, so, consider how GOLD is going to influence the currency, is it going to be stronger or weaker against the USD?

CAD- This pair is influenced by OIL price. If there is a fundamental news that will increase or decrease OIL price, than CAD will be directly influenced by OIL supply or demand.

NZD- It is corelated with AUD, and in the same time with GOLD price.

I usually try to stick with only 3 simultaneously trades, that are not corelated with each other, so I recommend choosing only one from the following point, as follows:

1, One of the following – EURUSD NZDUSD AUDUSD USDCAD GBPUSD

2, One of the following – GBPJPY EURJPY USDJPY NZDJPY or AUDJPY CADJPY

3, One of the following – AUDCAD AUDNZD GBPAUD GBPNZD EURNZD EURAUD

You need to pay attention to the base currency, so that you do not have the same currency included in pairs form the 3 points. What I mean by this, look at the following example on what will be the best trades chosen from all 3 points:

From point 1 – EURUSD

From Point 2 – GBPJPY

From point 3 – AUDCAD

If you open trades as in the example above, there will be 0 correlation between the pairs. And so, the risk for your positions will not be leveraged involuntarily.

Don’t stumble trading. Trade safe!

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