| Dear Friend, | | | | basic concept of risk management. This technique is |
| The currency markets are the backbone of global | | | | used all the time by banks, and especially major |
| economy and the banks are riding it like a bucking | | | | international corporations that do business in other |
| bronco. The banks don’t make their money from | | | | currency besides the dollar. This is simply a logical |
| speculating or trading the currency markets they | | | | choice when you are trading multiple currency pairs |
| make their money from being the currency market. | | | | to ensure that your trading account does not get |
| What I mean by the banks is being the market is | | | | depleted very rapidly. |
| that they will make money whether you win or lose | | | | Negative as well as positive correlations exist |
| on a trade. This happens because the banks make | | | | between all currency pairs and are susceptible to |
| money from the pip spreads on the front end and | | | | change based on the a variety of factors, and of |
| are always in a hedged position when a currency | | | | course monetary policy in that country being one of |
| transaction occurs. So it does not matter what the | | | | if not the biggest influence. A trader should check the |
| market ultimately the banks wins regardless. Well if | | | | currency pair correlation often to ensure that there |
| the banks hedge there position to protect them | | | | has not been any major changes in the way currency |
| selves, why don’t we as traders do the same. | | | | pairs are affecting each other. This can be done in |
| Everyone has heard the term for every action there | | | | any number of ways; most forex trading software |
| is a reaction, and every negative has a positive, and | | | | packages include the ability to view historical and daily |
| what goes up must come down; you get the picture. | | | | currency prices which will allow you to determine a |
| Well the same applies for the currency markets we | | | | correlation between currency pairs. In closing I highly |
| refer to it as hedging using negative correlations, or | | | | recommend if you trade currency you become |
| simply one pair goes up when the other pair goes | | | | familiar with Correlation Coefficient between |
| down and vice versa. It is very important for any | | | | currencies pairs so hedge your positions and limit your |
| one involved in the forex market to understand this | | | | market exposure for maximum profit. |