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A Look At Currency Relationships With Other Markets

Trading in the market does not happen in a vacuum. This mantra applies to all investment markets; the usual suspects like stocks & commodities but also Forex. Events come in many shapes & sizes. So also do the effects that they exert on the markets. The phenomenon we are looking at here though has to do with the effects the markets have on each other. Understanding these correlations will help you be more profitable in your task to learn forex trading online better.

Big Investment people always talk about diversifying your portfolio. The idea is not to put all your eggs in one basket so you can keep going in case on thing doesn’t work out so well. You also hear about hedging. It’s an interesting strategy that involves taking a position in one market that is opposite to one taken in another market to offset any exposure to major risk…in a nutshell. on the face of it it would seem counter-intuitive. It might seem that any gains made would also be cancelled because the loss on the opposite trade would be higher as well. However smart traders try to short off the losing trade once it becomes more apparent the direction that the trade is heading.

All of the above can be applied to the Currency Trading Market. I personally do not have an Account that allows me to invest in stocks or oil but I can apply the trades I might have made in either of these markets to my Forex Trading. A simple example is the correlation between Oil & the Canadian Dollar. Rising Oil prices help to increase the Canadian Dollar’s value against the dollar. This occurs because Canada is one of the World’s largest producers of Oil. Canada is also the biggest supplier of it’s neighbor the US.. When Oil is on the rise it good for Canada as much of Canada’s Economy depends on it. The end result is you can trade the US Dollar/Canadian Dollar currency pair armed with this information.

One can extend this to other currency pairs. You can also combine the application to profitable effect. Rising Oil in some conditions can be better for the Euro & not so good for the Dollar. Interest rates in Japan have been very low historically so when investor want to put their money to work US Equities are favored as there is higher rate of return. Thus the USDJPY currency pair tends to rise in value as the Yen is sold in favor of the dollar.

You have to be wary though as this relationships don’t always stay the same. Sometimes they will flip over without much warning or a disengagement will occur. This might be due to fear in the markets or just general change of mood. This was the case in January 2009 when Gold & the Dollar began to move up at the same time. Not everyone is fond of these interrelationships. Some people claim they are of little value & do not apply. However they are can be of value. While it’s possible to swamp yourself in information you shouldn’t disregard anything that might help. I think there are times when it best to go with the established trends. Like any other situation the trader has to be constantly vigilant & pay attention to the surroundings. The key thing is to ensure that your risk management strategy is clearly defined so if something goes against you you can ride it out.

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