Correlation: heatmap and matrix
Our Correlation tool has two modes, heatmap and matrix, and allows you to check the correlation between selected instruments tradeable in your region.
The values displayed in the tool are calculated based on the correlation coefficient. They are expressed in the numeric value in the range (-1,1) where:
- -1 = strong negative correlation
A value of -1 represents a strong negative correlation, meaning that historically, as the price of one instrument increased, the price of the other tended to decrease. . In most situations, having open positions that are strongly negatively correlated by price is a more risk-averse strategy. - 1 = strong positive correlation
A value of 1 represents a strong positive correlation, meaning that historically, as the price of one instrument increased, the price of the other tended to move in the same direction.. With all variables remaining the same, holding open positions of instruments that are strongly correlated by price exposes the trader to a higher level of risk. - 0 = no correlation
A value of 0 means that price movements between the two instruments are entirely uncorrelated, meaning either an increase or decrease in the value of one instrument will not have any effect on the value of the other.
Mode 1: Correlation heatmap
The Correlation heatmap has a single reference instrument, with nine other instruments used to compare different levels of correlation, in both the short and long-term.
We use close mid-pricing for calculations with granularity dependent on the time period:
| 5-minute closing mid-price | 1-hour closing price | Daily closing price |
|---|---|---|
| Time Period | ||
| 1-hour mode | 1-week mode | 1-month mode |
| 4-hours mode | 3-months mode | |
| 24-hours mode | 6-months mode | |
| 1-year mode |
As the example, if you see the reference instrument EUR/USD, compare it to GBP/USD for the 24-hour time period, here is what the value of 0.93 means:
As an example, when comparing EUR/USD to GBP/USD using the 24-hour time period, the returned value is 0.93. This value is calculated by the following method:
- First, we extract close mid-prices from all 5-minute candles within the last 24 hours for EUR/USD and GBP/USD.
- Then, using Pearson correlation coefficient method, we calculate the correlation between EUR/USD and GBP/USD.
- A value of 0.93 is returned.
Mode 2: Correlation matrix
The correlation matrix has a single hardcoded time period of 1 year and gives you a wider range of instruments for comparison (10 instruments versus 10 for comparison). The calculation method is exactly the same as for the heatmap, described above.
Instead of a choice of time frame, the Correlation Matrix has a hardcoded period of 1 year, but offers a wider range of currencies for comparison. All major currencies are available.
Data sources: Proprietary OANDA mid-market pricing. Calculations are based on the closing mid-price at 5pm NY.
Disclaimer: This insight is for general information purposes only, not to be considered a recommendation or financial advice. Past performance is not indicative of future results. Forex trading is high-risk. Losses may exceed deposits.
