EA for MT5 [Eos] is released｜Dow Theory x Wave Analysis x SMC
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MT5 Correlation Coefficient Indicator Overview
What is the correlation coefficient?
The correlation coefficient is a numerical value that indicates the relationship between two sets of data. Specifically, it measures how much one piece of data increases or decreases when the other piece of data increases. This number ranges from -1 to 1. This correlation coefficient is widely used to understand the relevance of price trends between two different financial instruments. For example, if two currency pairs have a strong positive correlation, they are expected to react in the same way to the same market environment. On the other hand, if they have a negative correlation, when one goes up, the other tends to go down. This can be used as important information when creating an investment portfolio to diversify risk.
Correlation coefficient values and general meaning
The correlation coefficient is an indicator that takes values between 1 and -1. When the correlation coefficient is close to 1, two stocks have a strong positive correlation. This means that when the rate of one issue rises, the rate of the other issue tends to rise as well. Conversely, when the correlation coefficient is close to -1, the two issues have a strong negative correlation, meaning that when one issue rises, the other tends to fall. There are various theories on the meaning of the values, but in general, they are considered to have the same meaning as shown in the following chart.
Correlation in Exchange Stocks
Currency pairs like USD/JPY, EUR/USD, and GBP/USD, which are tied to the key currency dollar (USD), are greatly affected by the strength or weakness of the dollar. This is because the dollar as a reserve currency is the most widely traded currency in the global foreign exchange market, and since many market participants evaluate other currencies based on the dollar, the dollar's movement directly affects other currency pairs. Therefore, EUR/USD and GBP/USD are likely to be positively correlated since both have USD in the denominator, while a negative correlation is likely to occur in the USD/JPY and EUR/USD currency pairs since the former has USD in the numerator and the latter has USD in the denominator.
How to use the Correlation Coefficient Indicator in MT5
MetaTrader 5 (MT5) is a very powerful trading platform that offers many standard technical indicators, but there is no indicator that displays the correlation coefficient as a standard feature. However, MT5 also supports the MQL5 programming language, which allows users to create their own custom indicators or download custom indicators created by other developers from the MQL5 community market. This makes it possible to use indicators that display correlation coefficients. We have developed a correlation coefficient indicator using this custom functionality and would like to share it with you.
Operation image
Correlation for each currency pair
Correlation Coefficient (USDJPY / EURUSD)
Looking at the daily level, we see a generally strong negative correlation. Both currency pairs are considered to be heavily influenced by the reserve currency, the dollar.
Correlation Coefficient Trends (EURUSD / GBPUSD)
There is a strong positive correlation.
This one is also strongly influenced by the dollar, as both stocks have USD in the denominator.
Correlation Coefficient (USDJPY / EURGBP)
Over the long term, the correlation is weak.
Since EURGBP is not related to the dollar, it tends to be difficult to link to dollar-related stocks.
Although it appears to be an unusual stock, the fact that it is not easily linked to the dollar makes it worth considering as a portfolio diversifier.
Correlation Coefficient (USDJPY / GOLD)
Over the long term, there are cases where the correlation is strong positive or negative.
GOLD has the same meaning as XAU/USD, so it is a dollar-sensitive issue, but the situation varies from period to period.
Correlation coefficient trend (GOLD / SILVER)
It can be said that GOLD and SILVER, which are in the same precious metal category, often behave similarly over the long term.
Trading Strategies Utilizing the MT5 Correlation Coefficient Indicator
Strategy 1: Portfolio optimization using correlation coefficients
The way to optimize a portfolio using correlation coefficients is to understand the correlation between different assets and diversify investments accordingly. Specifically, combining assets with low (negative or near zero) correlation coefficients can reduce overall risk.
Strategy 2: Pair trading using correlation coefficients
Pair trading is a strategy of finding two strongly correlated assets and buying one and selling the other. Profits can be made by taking a position when the correlation deviates and closing the position when the correlation returns to normal levels. This type of trading technique is also called arbitrage or arbitrage. Since the correlation coefficient fluctuates over time, it is important to monitor its changes using time series analysis. By watching the variation of the correlation coefficient, it is possible to develop timely trading strategies in response to market changes.
Strategy 3: Hedging strategy using correlation coefficient
By going long an asset with a high correlation coefficient and simultaneously shorting another asset with a high correlation coefficient, you can compensate for losses due to price fluctuations in one asset with price fluctuations in the other asset. By properly utilizing these strategies, MT5's Correlation Coefficient Indicator is a powerful tool that will make your trading more efficient and less risky. Each strategy should be used according to its characteristics and objectives, so it is important to choose the best strategy based on your investment goals and risk tolerance. You can also use a combination of these multiple strategies.
summary
We have looked at the MT5 correlation coefficient indicator and the risk diversification strategies that utilize it. The correlation coefficient is an important tool for measuring the relationship between price fluctuations between different assets, and its value can give an idea of how similar or conversely different the movements of assets are. Correlation coefficients can also be used to optimize portfolios in terms of risk diversification and provide an opportunity to consider advanced trading strategies such as pair trading and hedging strategies. We hope you will make use of the MT5 Correlation Coefficient Indicator to brush up your trading strategies.
Use multiple indicators in combination!
To improve the accuracy of technical analysis, it is essential to evaluate multiple indicators in combination with each other in a comprehensive manner.
We are expanding our lineup of originally developed indicators on this site so that they can be used immediately,
Please also refer to the other indicator introduction articles.
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https://smart-trading-strategy.com/selene-dow-theory-based-swing-trading-ea/?lang=en
We will provide you with an indicator and a set of support documents when you contact us through our service desk.
*Indicator-only use is available for a fee. Please contact the service desk for details.
If you want to use MT5, I recommend an overseas brokerage firm!
The secret to successful FX investing with MT5 is to combine it with an international brokerage firm.
Domestic Securities Companies
❌ Few MT5-compliant vendors exist.
❌ There is a risk of additional margin. May incur losses in excess of the amount deposited.
Securities Companies
✅ Many brokerages offer a zero-cut system that allows you to risk no more than the amount of your deposit.
✅ Major foreign brokerages such as HFM and XM are safe to use.
- Ability to trade in a low spread environment
- Take advantage of deposit bonuses to start trading with small amounts
- No deposit and withdrawal problems.
- Stable execution with minimal trade delays
If you use MT5, please consider opening an account at an overseas brokerage firm.
summary
To achieve efficient investment,
structuring and automation
is essential.
We will continue to compile ideas to help you analyze the market environment and provide you with tools that you can use immediately.
Automated trading tools make it possible to automate trades, but the decision of when to start and stop the EA is a personal decision.
In order to use the EA wisely, we hope you will make use of the indicator to help you analyze the market environment.
