Currency 💲 Correlation: What it Means and What You Should Know

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In the financial markets, two currencies are always paired together in the crypto market, if you want to trade STEEM you will need to pair it this way, STEEM/USDT, whereas in the forex market, if you want to trade on any currency of your choice it must be in this way, GPD/USD, USD/JPY and so on.

The degree at which the price of the asset! move together or against each other is what is known as correlation. Let's throw more light on what currency correlation is in crypto.

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Currency Correlation

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In financial markets such as crypto or forex I am sure you must have seen that when a certain currency pair rises, the other currency pairs fall, which on the opposite side of it you must have seen that when the currency pair falls, the other currency pair will also fall which if you have witnessed such market movement before you should know that it is currency correlation.

Generally in the financial markets, correlation means the statistical measures of how two assets move in a close relation with each other. On the side of currency correlation, it helps us to know if two currency pairs are moving in the same direction, in opposite directions, or if the two pairs are moving randomly.

Now this is what you should know as a trader. When you see that one currency is moving in a positive direction and the other currency is moving in a negative direction don't think that which is moving in an opposite direction is been isolated in the market.

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For example in the financial markets, there are times you will see that the price of gold and oil which are commodities goods usually rise while the price of high-risk assets such as BTC, and ETH tumble. The reason is that many institutions and people are more interested in owning gold or oil than riskier assets such as crypto. Well, all this happens because the motive of every investor is to make profits which leads to different views in the market.

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Correlation Coefficient

Now let's talk about the correlation coefficient. As we all know in mathematics Coefficient means further calculation which in the aspect of the correlation coefficient is when the correlation is computed into the correlation coefficient which is between -1 (negative value) and +1 (positive value).

The correlation coefficient helps us to measure how strongly two (2) variables are related to each other. This means the coefficient stands as a relationship between two different data, having a positive and negative range.

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The Positive correlation

Positive correlation is represented with +1 which when you see you should know that the two currency pairs that you are trading will move in the same direction of time.

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The Negative correlation

A negative correlation is represented with -1 which when you see you should know that the two currency pairs that you are trading will move in opposite directions of time.

However, besides positive and negative correlation, the correlation can become 0, which means there is Zero or No correlation between the two currency pairs since they are independent of each other.

In the financial markets, it is difficult to tell how long one pair will move about the other pair, which is why analyzing the market before entering the market is very crucial.

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Conclusion

_{We have learned about currency pairs in this post. It is a good thing that you have gotten an idea of what currency pairs mean in the financial markets which can be of help to you. Note, that this post is strictly for educational purposes and not as financial advice. Please ensure you do your research before investing in any digital asset.}