How Stock and Commodity Market Prices Affect Exchange Rates
In our global financial system all of the major world financial markets are interconnected, yet the most popular form of forex market analysis, technical analysis, concentrates only on one market at a time. Most traders that implement technical analysis-based trading strategies may use tools such as candlestick formations or moving averages, but they will only focus on one chart or one market at a time.
Technical analysis can still be very useful to a forex trader. After all, the vast majority of all daily forex trading volume is speculative in nature, and all of those masses of traders working at their computers are likely following the same handful of indicators and oscillators, as well as focusing on the same levels of support and resistance. If enough traders are following a 14-day Relative Strength Index indicator then making successful trades based on that indicator becomes self-fulfilling in nature.
In fact, it is possible for you to completely ignore all other financial markets and only focus on one currency pair's chart, and you could still have a profitable trading strategy. However, the stock and commodity markets (with oil and precious metals playing a large role) of a given country will inevitably affect the value of that country's currency, so it would be wise for any astute currency trader to stay aware of the goings-on of other related financial markets.
An interesting development that comes with the widespread proliferation of forex trading is that there is a relative lack of intermarket analysis compared to most stock or equity markets. If you have even a brief knowledge of stock-picking strategies, then you should be familiar with the concept of diversification (spreading your stock picks across different sectors) as well as using a general index of stocks to rank a specific sector's performance.
This is a good example of intermarket analysis, as these equities traders compare stocks across different sectors, small cap versus large cap stocks, and global stock prices versus domestic stock prices. Most commodities traders commonly practice intermarket analysis as well, by comparing related commodities such as silver versus platinum or soybeans versus corn.
There is not nearly as much intermarket analysis in currency trading on the surface as there may be for other markets, but geopolitical events and the prices of other markets all go into the factoring of exchange rates. A wise forex trader seeks to be as informed as possible, and this includes knowing of all other developments, whether it is interest rates or new stock market highs, that can affect a given currency's exchange rate.
A good way that you can begin to implement intermarket analysis into your forex trading is to stay abreast of the values of certain commodities that affect the value of currencies the most, namely oil and precious metals. There are many different precious metals markets, so if you do not want to spend all day doing your price checks then you can focus on just silver and gold (or even just gold alone if you are feeling lazy, since it is the quintessential precious metal).
Another good way a forex trader will use this type of analysis is to focus on the main stock index for a given country (such as the S&P 500 in the United States). If you watch Bloomberg or CNBC while you are doing your currency trading and you hear that a major stock index for a geographical region is hitting all-time highs, it would be a wise bet that the value of the currency involved will also increase.
In our global financial system all of the major world financial markets are interconnected, yet the most popular form of forex market analysis, technical analysis, concentrates only on one market at a time. Most traders that implement technical analysis-based trading strategies may use tools such as candlestick formations or moving averages, but they will only focus on one chart or one market at a time.
Technical analysis can still be very useful to a forex trader. After all, the vast majority of all daily forex trading volume is speculative in nature, and all of those masses of traders working at their computers are likely following the same handful of indicators and oscillators, as well as focusing on the same levels of support and resistance. If enough traders are following a 14-day Relative Strength Index indicator then making successful trades based on that indicator becomes self-fulfilling in nature.
In fact, it is possible for you to completely ignore all other financial markets and only focus on one currency pair's chart, and you could still have a profitable trading strategy. However, the stock and commodity markets (with oil and precious metals playing a large role) of a given country will inevitably affect the value of that country's currency, so it would be wise for any astute currency trader to stay aware of the goings-on of other related financial markets.
An interesting development that comes with the widespread proliferation of forex trading is that there is a relative lack of intermarket analysis compared to most stock or equity markets. If you have even a brief knowledge of stock-picking strategies, then you should be familiar with the concept of diversification (spreading your stock picks across different sectors) as well as using a general index of stocks to rank a specific sector's performance.
This is a good example of intermarket analysis, as these equities traders compare stocks across different sectors, small cap versus large cap stocks, and global stock prices versus domestic stock prices. Most commodities traders commonly practice intermarket analysis as well, by comparing related commodities such as silver versus platinum or soybeans versus corn.
There is not nearly as much intermarket analysis in currency trading on the surface as there may be for other markets, but geopolitical events and the prices of other markets all go into the factoring of exchange rates. A wise forex trader seeks to be as informed as possible, and this includes knowing of all other developments, whether it is interest rates or new stock market highs, that can affect a given currency's exchange rate.
A good way that you can begin to implement intermarket analysis into your forex trading is to stay abreast of the values of certain commodities that affect the value of currencies the most, namely oil and precious metals. There are many different precious metals markets, so if you do not want to spend all day doing your price checks then you can focus on just silver and gold (or even just gold alone if you are feeling lazy, since it is the quintessential precious metal).
Another good way a forex trader will use this type of analysis is to focus on the main stock index for a given country (such as the S&P 500 in the United States). If you watch Bloomberg or CNBC while you are doing your currency trading and you hear that a major stock index for a geographical region is hitting all-time highs, it would be a wise bet that the value of the currency involved will also increase.
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