FOREX Opposite Pairs
Foreign exchange trading, also known as FOREX or currency trading, is all about pairs. When you trade FOREX, you're swapping one type of currency for another and making money off of changes in exchange rates. It's not surprising that certain currency pairs show relationships, or correlations, in their behavior over time. When the correlation is inverse -- one goes up when the other goes down -- you have a FOREX negative pair.
Other People Are Reading
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Currency Pair Basics
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Currency traders deal in exchange rates. For example, they might buy euros with U.S. dollars when dollars are strong -- when one dollar buys more than one euro, like $1:€1.5. Then they hold their dollars until the relationship changes and the dollar weakens. Even a change of one-tenth of a euro, from $1:€1.5 to $1:€1.4, can make a nice profit if the investment is large enough. If you invested $1 in this scenario, you'd get $1.07 back -- a 7 percent profit.
Currency Correlation
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There are dozens of economic, political and sentimental factors effecting the exchange rates at any given time. Often, strength in one part of the world economy will indicate strength or weakness in another. Certain sets of currency pairs have shown correlation over time: when one pair strengthens, another pair may follow -- a positive correlation. The opposite is also true: when one pair strengthens, another may weaken -- negative correlation. Correlation is expressed as a decimal value between 1 and -1. Values greater than zero are positive, those less than zero are negative. The closer the correlation value is to 1 or -1, the stronger it is. If the correlation is close to zero, it is weak. Zero values equal no relationship between the pairs at all.
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Correlation Charts and Hedging
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FOREX dealers and other financial reporting services show currency correlations in charts that reflect relationships in various pairs over time. In a volatile market, traders can hedge their bets on future exchange rate movement by investing in currency pairs that are negatively correlated. In general, no matter what the future holds, one of the two pairs will strengthen and allow for a profit. In a perfect hedge situation, the profit made on the strong pair exceeds the loss incurred by the weaker pair. Profit is less than if the trader had chosen only the "winning" pair, but loss is less than if she'd chosen only the losing pair.
Warning
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Correlations are nearly as volatile as exchange rates themselves. Economic and political forces are constantly changing the relationships between currency pairs, and a current negative correlation can change at any moment. Traders dealing in negative pairs should consider short, medium and long term data as well as current and predicted future trends to make the best investments.
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