Trading Commodity Correlations

Do you have an opinion of the commodities market but looking to trade a Forex pair? Understanding correlations between markets can be a great way to find market direction by comparing two completely different assets. One of the most common correlations is found between US Oil and the USDCAD currency pair.

 

Pictured below can see this correlation in action through an overlay of both US Oil and the USDCAD on a daily charts. What you are seeing here is known as an inverse correlation. As US Oil decreases in value, it is expected that the USDCAD will move higher. The opposite is true if US Oil advances, then we can reasonably expect the USDCAD to decline. Knowing this, an astute trader can successfully take their opinion of one asset to trade another. Let’s look at an example.

 

Learn Forex – USOil & USDCAD Correlation

Normally traders will use levels as resistance as an opportunity to plan market entries as price either breaks through or retraces through these points. Traders that already have an opinion on USOil can plan to trade the USDCAD accordingly.

 

By expecting prices to decline on USOil, it would be predicted that the USDCAD would break higher in line with our mentioned inverse correlation. Traders can use the resistance level and plan for a breakout to higher highs in an established uptrend. Entry orders can be set below this point while a stop loss can be placed under current resistance. 

Learn Forex – USDCAD Breakout Setup

Remember there are always two sides to every trade. Traders expecting US Oil to increase in value would expect the exact opposite. If resistance holds and price remains beneath traders may reasonably expect the USDCAD to turn lower.