How many times have you flipped to a chart only to see a move that has just taken place and you think to yourself, “darn, missed another one”? For many traders, adhering to strict reward/risk principles prevent them from taking trades that may have already traveled too far from support or resistance as the risk may be too great. Missing trading opportunities is a common problem and can sometimes be more frustrating than losing trades. It gets in your psyche and festers, invoking all of the “woulda, coulda, shoulda” feelings traders are prone to have. Well there is a way to mitigate these feelings, and it involves the use of basic correlation analysis.
Correlation Analysis
Simply put, correlations in the market are relationships that one security has to another. These instruments can be positively correlated, which means that they tend to trade in the same direction, or they can be negatively correlated, which means that they tend to trade in the opposite direction. A correlation of ‘1’ is a perfect correlation, meaning that two securities trade exactly the same. A correlation of ‘-1’ means that two securities trade perfectly opposite to one another.
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Source: FXStreet
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