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Rollover, correlation and ask/bid difference

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Another important article related to forex basics includes rollovers, correlations and the difference between ask-bid price. My goal in this article is to try to give some example and explain to you what does terms means.

The main points I am going to have a look at this article are:

  • Rollovers in forex market
  • Correlations in forex market
  • And the difference betwween ask-bid price as expense

1. Rollover in forex market

Rollover is a process of postponing already opened positions execution on different date. The price of this postpone is based on the interest rate between base and quote currency. The rollover is not much important for shor-term traders, however, it is very important for long-term trading because the positions may be kept for few days. In case, you are a trader for long-term trading then you must check your broker's parameters for rollovers.

2. Correlation in forex market

The correlation in forex market is the process of acting of one currency movement to the other, or we can say this is the relation between 2 currency. These movements can be on the same way, opposite or in totally different ways.

If the price of currency pairs relations are strong, this means one of them moves up and the other one also goes up, or both goes down. In this case, it is called that there exists strongly positive correlation. If the prices of 2 currencies moves independently then it is called missing of correlation.

The possible currency combinations of the 7th base currency is 21 pairs. You can find out correlation up to a point in every combination of currency pairs. The correlations are changing in the time and it is possible to be studied for the different timeframes. Some traders analyses the correlations as part of their trading strategy. They look for stark changes and they use these correlations as possibility of profits.

Strong positive correlation is possible to have between 2 pairs with one currency in the first zone and different in the other one. For example EURUSD and GBPUSD. Euro and Pound against Dollar. In this example GBPUSD is called transitional pair.

Trading against yourself means having opened position on both sides with negative correlations between them.The idea behind having negative correlation is that when one of the positions goes to your plus the other one will go to minus. Overlap is the opposite of "trading against yourself" - when the trader has opened positions in two pairs with strong positive correlations. In both cases your situation is not optimized because of these 2 situations.

Correlation is really important tool in trading.

3. The difference between ask-bid, or we can say the expense on trade

One of the most important points which is related to ask and bid is the direct expenses on every position. Here is the formula:

expense = ask-bid

In the forex market the trader buy ask and sell bid. The trade is end when it is closed and not when it goes to opposite - to buy if you are in short or sell - long.

Brokers increase the spreads as they add profit in them. ECN accounts works with commissions as they left the spread constant no matter what is the trade.

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