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Inside the Currency Market: Mechanics, Valuation, and Strategies by Brian Twomey

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Currency Correlations and Trend Lines

An explanation of correlation coefficients is included to understand why and how currency pairs correlate or don't correlate.

Somewhere around the late 1800s or early 1900s, Karl Pearson was credited with Pearson's Product Moment Correlation Coefficient, the famous R. The formula is:

image

This equation asks the question how strong and what direction is a linear relationship between X and Y The purpose is only to determine if a positive or negative relationship exists. It's a measure on a number line with 0 as the middle bound between positive and negative values. A perfectly positive value means r = + 1 and perfectly ...

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