EURUSD and GBPUSD "correlation" falls apart at small timeframes

[Amanhasnoname]

On a daily chart, EURUSD and GBPUSD look like twins. On a one-minute chart, the relationship is much looser, and scalpers who treat one as a confirmation for the other get caught out. A typical failure: EURUSD breaks a level, GBPUSD has not, and the trade goes in on the assumption that sterling will follow. Sometimes it does. Often it simply stays idle because the next catalyst is UK-specific.

Correlation measured over a short window is noisy, and it shifts through the day. It tends to be highest when the dollar is driving everything, such as around US data, and lowest in the London morning when UK or euro-area headlines dominate. A correlation of 0.85 over the last month can easily be 0.3 over the last twenty minutes.

A better way to use the pair is as a regime check. Compute a rolling correlation of one-minute returns over, for instance, the last 30 bars. When it is high, a signal on one pair can be backed by the other. When it falls, treat each pair independently and drop the confirmation filter.

Also remember that running both pairs in the same direction doubles exposure to a single dollar move.

Which window length gave the most stable rolling correlation on your setup?