Introduction to the Currency Pairs Correlation Indicator
One unique characteristics of the forex market is that traders are trading currencies for another currency. Each of these currencies has its own supply and demand which moves prices. This means that currency pairs can be correlated at times. The Currency Pairs Correlation Indicator is a tool that can help traders identify correlated markets and trade in the direction of the correlation.
What is the Currency Pairs Correlation Indicator?
The Currency Pairs Correlation Indictor is a custom technical indicator which detects correlations between currency pairs.
This indicator plots two oscillating lines on its indicator window. It plots a blue line to indicate the direction of the main currency pair and is also setup to plot an orange line to indicate the direction of the paired currency pair. It then plots green bars to indicate a bullish correlation and red bars to indicate a bearish correlation which should reflect on the main currency pair’s price chart.
How the Currency Pairs Correlation Indicator Works?
The Currency Pairs Correlation Indicator uses an underlying moving average line on each of the currency pair.
It is also important to note that this indicator was intended to detect inverse correlations wherein the currency where we will be looking for correlations would be the term currency on the main currency pair and the commodity currency on the second currency pair. For example, this indicator is preset to detect correlations in the USD using the EURUSD as the main currency pair and the USDCHF as the second currency pair.
The indicator then detects the deviations between the two underlying moving average lines and plots green bars to indicate a bullish correlation and red bars to indicate a bearish correlation, which should be visible on the main currency pair.
How to use the Currency Pairs Correlation Indicator for MT4
This indicator has several modifiable option fields within its indicator settings.
Traders can modify the currencies used on the “symbol1” and “symbol2” fields.
The settings of the underlying moving average lines can also be modified on fields such as “MAPeriod1”, “MAPeriod2”, “MAMethod1”, “MAMethod2”, “MAPrice1”, “MAPrice2”, and more.
This indicator can be a confirmation of correlation direction based on the color of the bars it plots. Traders can opt to trade only in the direction of the indicated correlation or use the appearance of colored bars as an entry signal based on correlation.
Note that this indicator does not work in pairs wherein the currency tested for correlation are both on the commodity currency side or both on the term currency side.
Buy Trade Setup
When to Enter?
Open a buy order as soon as a green bar appears on the Currency Pairs Correlation indicator. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a possible bearish reversal.
Sell Trade Setup
When to Enter?
Open a sell order as soon as a red bar appears on the Currency Pairs Correlation indicator. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a possible bullish reversal
Conclusion
In its current preset, this indicator is best used on the EURUSD pair. However, it could also work for other currency pairs which has the USD currency on the commodity currency side of the equation on the main currency symbol.
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