Understanding correlations will help traders to look at two seemingly different markets or assets and observe how the market price fluctuates relative to each other. This will allow traders to develop opinions on markets that they may not have followed in the past. One market that attracts many traders is gold. However, it is not so simple to be successful trading gold, even if you are a forex trader who has years of experience in that market. Finding correlations may help and here we will specifically look at the correlations between the AUD/USD currency pair and the price of gold and understand how they are related to understand how to trade the correlation.
AUD/USD and Gold
There are two correlations that can be made between the Australian dollar and the price of gold. Firstly, the AUD/USD can be looked at as a correlating asset because both are priced in US dollars. The AUD/USD pair is the price of Australian dollars in US dollars, while the XAU/USD is the price of gold in US dollars. In other words, when the US dollar strengthens, the two assets both tend to depreciate, generally moving in the same direction. Also, because Australia is a big gold miner, the fluctuating price of gold impacts how much funds are transferred into AUD to buy the metal and with these changes in the demand of the currency, the AUD/USD currency pair can be affected.
Trading According to the Correlation
To trade positively correlated assets, you first need to find a direction from one of the underlying assets. Look for trends in one of the assets for a signal of a new trend in the other. For example, if gold is trending upwards, this could be a signal for a coming uptrend of the AUD/USD. If traders understand this correlation, they will have an overall view of the market. Most traders choose one of the assets to trade in; however, with understanding you have more flexibility.
How to Get Started
As with everything, before you get started you need to do your research. If you’re a forex trader, don’t just jump into trading gold thinking you will manage just as well. Gold trading is not for beginners. Begin by studying the gold market thoroughly to understand the daily range, volatility, indicators and anything else that impacts the market. Look at charts and find correlations. Before you start, use a free demo account and trade there. This will help you get a feel for how price fluctuations affect commodities and currencies, but will allow you to practice trading in real time to see the outcome of your trades. You can do this for as long as necessary and some people suggest trading in a free demo for two to three months before you trade for real. The more you get an understanding of the correlations, the more successful you are likely to be.