Have The Industry Correlation Declined During The Pandemic?
If you are involved in trading then you must know about industry correlation. It is used by expert traders to increase profitability. Throughout every year correlation is used in a different manner. But when we talk about 2020, then there is always a different situation.
We all know that the global market has seen a different situation in 2020. It is all due to the coronavirus epidemic. Every trading market has seen unpredicted and dramatic situations.
In a similar way, the industry correlation has also changed the way traders used to trade. Because different financial instruments reacted differently in a pandemic.
The oil markets have seen different impacts of a pandemic. While the forex market and stock market have impacted differently. So there was an unbalanced situation in industry correlation too.
Understand The Industry Correlation
The question to answer today is whether the industry correlation declined this year? Well, before answering the question, let us tell you something interesting.
Don't you want to know what is industry correlation? It will help you understand whether correlation declined this year or not. All of these markets are correlated.
But how they correlated and what were the expectations from this correlation? Sometimes a trader trades various assets like currency pairs and stocks.
But he doesn't always expect the positive impact of correlation. So there is always a different impact. Let's understand what is the base of the industry correlation.
The base of industry correlation
What is the base of industry correlation? Two emerging markets are never interlinked within the market. The correlation is all about in the outer world. There is no link between forex trading and the stock market inside the market.
They are correlated because currencies are used to buy stocks. Similarly, some major stocks impact the way the forex traders trade forex. All the financial instruments are traded with such links. That is why industry correlation has become more important.
Types of industry correlation
Industry correlation is always classified into two major segments. We can know it as the type of correlation. Almost every major exchange market lies under these two categories. These two major categories are positive and negative. So markets can move with two types of correlation.
Suppose that two trading platforms or the markets have a positive industry correlation. Now how they will move with each other? They will move positively in the same direction. This positive relation can also see a downtrend movement.
Suppose that currency trading and stock trading are correlated positively. Now the stock price and forex rates will move in the same direction.
The negative industry correlation is the exact opposite of the positive one. It shows that the two linked markets or assets will move opposite. A trading platform having a negative correlation with others will move opposite.
You can learn how to trade in negative correlation from various trading courses. A different trading strategy has to be used in negative correlation.
Pandemic Impacted Major Industry Correlations
Now let's get started with the main section of this post. Here we will talk about the major industry correlation. We will try to find whether the industry correlation has declined or not. It is important to know because it will bring changes to your trading account.
Covid-19 had a huge impact on various markets. Whether it was the foreign exchange market or the stocks. Even the commodities were impacted by it. It has impacted major market factors like liquidity, market volatility, adaptability, etc.
Oil And Stocks
The first major market correlation is between oil and stocks. It is one of the most important industry correlations. The technical analysis has proved a negative correlation between oil and stocks. When crude oil prices fall, the stocks will see an uptrend movement.
But during COVID-19 this correlation was not so impactful. Because the demand for oil has fallen in a pandemic. So the drop in bent crude oil has not impacted Wall street and NASDAQ.
Stocks And Forex
Stocks and forex exchange trading have a strong industry correlation. The first reason is that the stocks are bought by using currencies. The second reason is that stocks can bring foreign investment to any country.
That foreign investment can really boost the currency price. So these both markets can have both correlations.
A jump in stocks can bring upward and downward movements in forex prices. Similarly in the pandemic, some currencies like USD grew up as a parallel to the US-stocks. While some currencies have seen a downfall.
Oil And Forex
Apart from other fundamental analyses, there is a strong correlation between these two markets. All the oil market deals are done via the United States dollar. And the US-dollar is one of the major currencies. So the drop in oil will bring upward movement in forex.
So there is no reason to say that pandemic declined industry correlation. You can see that oil dropped and the currency-market grew so much. But, if you are in retail forex, then situations may be different in live trading.
Commodities And Stocks
In this arena of mobile trading buying a commodity is easy. Commodities are like the raw products used by any corporation. The commodities price going up will bring the stock prices down.
During the pandemic, this industry correlation was declined. It was all due to the low demand and supply of commodities. Meanwhile, the stocks were affected more by oil and forex news.
Commodities And Currencies
Forex charts have industry correlation with commodities too. But during the pandemic forex trading strategies were not that much impact. So you can say that the commodity market and forex correlation was declined.
Fx-market was impacted by other factors effectively. Online forex trading was beyond bought or sell actions this year.
What Was Expected From Industry Correlation?
What trading accounts were expecting from industry correlation during the pandemic? As usual, a normal impact was impacted by any trading system. But all these things were changed during the pandemic.
Even the minor factors of various markets were impacted. These minor factors were trading commission and transaction costs.
Only free trading was not affected because the pandemic was completely unpredicted. So that is why it affected everything with an unpredicted movement.
Nothing was happening according to the prediction of market movers and market makers. Somewhere there was a decline in correlation. But somewhere it has shown the effective format of it.
Summary - Industry correlation
Here in this post, you can see the different impacts of industry correlation. There cannot be the same situation for all the markets. You can give a single statement for all the markets.
Some markets were performing well as compared to their past performance. But some assets matched the margin requirements only.
Retail investors or individual traders were hesitant to invest in financial markets. Because everything happening in the market was unpredictable. Even the trading volume was affected.
Market maker's investment advice was not enough for the new traders. So we can say that to an extent the industry correlation was declined.
There were so many changes in the global market due to the pandemic. From supply and demand to consumption, everything changed.
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