The Correlation Matrix gives traders invaluable market information on different time scales and enables them to make better risk-informed decisions. The Matrix show correlation between different markets, and lets the trader highlight areas of low or high correlation.
The Correlation Matrix helps traders to manage risk and trade with greater confidence. The tool shows a grid of the correlations between pairs of trading symbols. It is an overview of all the options available to a trader - and, like all BlackPearlFX tools, the Correlation Matrix will handle any symbols which are available in the underlying trading platform, allowing a calculation of the correlation of metals and equities - if available - against forex. (For detailed inspection of the correlation between any two instruments, traders can drill down using the Correlation Trade tool)
The grid is displayed not only as numeric values (ranging from -100 to +100), but also using simple colour-coding which helps traders to identify strong or weak correlation at a glance. Strong correlation is marked in red because traders will typically want to avoid it - or, at least, tread carefully when dealing with open positions in two symbols which are strongly correlated against each other.
The trader can change the basis of the calculation, selecting a timeframe such as M15 and a number of historic bars, based on the most appropriate time period for the length of trade which they are expecting.
Highlighting strong or weak correlation
The tool lets the trader highlight sub-sections of the grid, e.g. isolating symbols which are strongly or weakly correlated against each other.
"What if?" scenarios
The tool can calculate an average correlation between all the symbols in which the trader currently has an open position. The app also lets the trader select any basket of symbols and then calculates the average of the current correlations between them. This enables the trader to assess the internal risk of a prospective portfolio of trades which they are currently considering.
Correlation can have a major effect on trading risk. For example, if EUR/USD and USD/CHF have been strongly correlated, then a trader who had open positions in both would have seen very similar profits on each position. In effect, the trader did not have two positions; they only really had one position. (They will either have seen similar profits or losses on each position, or they will have seen matching profits and losses which largely cancelled each other out.)
It is generally advisable for a trader to minimise the correlation between their open positions. Otherwise, they are either trading the same price action twice over, or they have two positions which largely cancel each other out.
Click here to download the user guide: BlackPearlFX – Correlation Matrix.pdf