Pay close attention to your currency correlations!

In the image below, when the top chart reaches key support and reverses long, the bottom chart nearly always reverses short.

Why does this happen?

Well, in this particular case – the top chart is DXY, which is the US dollar index. It’s an instrument that tracks the performance of the US dollar compared to a basket of other currencies. The higher that chart goes, the stronger the US dollar.

The bottom chart is AUDUSD – which is the Australian Dollar in comparison to the US Dollar. As the AUD rises in comparison to the USD, this chart goes up, and the USD goes down (comparatively)… hence the INVERSE correlation of these two instruments.

There are many currency correlations in forex! It is wise to become familiar with them.

Here’s a really neat currency correlation matrix!

So how can I actually use this?

As your trading experience develops, you’ll be moving into a more discretionary/advanced routine. This means your job for each and every trade decision hinges around your ability to stack confluence in your favor. If you can stack 5-6 technical factors in your favor, and then cross check them on other pairs and instruments, you can improve your probability of success on the trade.

In Platinum, we teach students a technical analysis phenomenon called “Hidden Treasure”. This is where a profitable edge forms in the market, but it is hidden to basic mechanical strategies. While new traders often miss these hidden treasures, the master speculator always finds them.

The best way to find these treasures is:

1. Multiple Timeframe Analysis
2. Currency Correlations

Hidden treasure doesn’t just mean entry points. Hidden treasure also arises in the form of high probability exit points, too!

Example

Say you’re long on AUDUSD.

• Ideally, you want AUD to rise and USD to fall.
• After a reasonable run-up, your trade sits in profit and your strategy does not yet signal an exit.
• However, you do notice the following…
• DXY (The US Dollar index) is showing deceleration on key support. This is a bullish sign for the USD, the opposite of what you want.
• EURUSD is rounding out and losing momentum with tweezer tops after run up. Again, this signifies USD strength.
• USDJPY has formed a double bottom on key support with bullish MACD divergence. More USD strength.

In summary, even though your long AUDUSD position may not have signaled an exit point, the signs are there that USD is (very likely) approaching a turning point. If you’re trading short-term movements, this may be a wise time to take action.

Understanding how to effectively utilize forex correlations can add another dimension to your technical analysis. I recently made a Snapchat lesson about my forex correlation method. This is an advanced technical method that may be used effectively to help you create your watchlists and improve the probability and accuracy of your entries and exits.

PS. As usual, I went off on a wild tangent toward the end of the lesson 😀

https://www.youtube.com/watch?v=WV5rePBSoRU

If this lesson was helpful, share it with a friend or trading partner who could benefit from it.