Forex trading using intermarket analysis

Most traders stress the role of fundamental information and historical single-market price data in analyzing markets for the purpose of price and trend forecasting. Traders do need to look back at past price action to put current price action in perspective, but they also need to look forward to anticipate what will happen to prices if their analysis is to pay off in the real trading world. To be able to look ahead with confidence, however, traders need to look in one other direction, and that is sideways to what is happening in related markets, which has a major influence on price action in a target market.

What are the external market forces that affect the internal market dynamics — the intermarket context or environment in which the market you are trading exists? Moving beyond single-market analysis Intuitively, traders know analysis markets are interrelated and that a development that affects one market is likely to have repercussions in other markets.

However, technical analysis has traditionally emphasized single-market analysis, focusing on one chart at a time and failing to keep up with structural changes that have occurred in financial markets as the global economy has emerged with advances in telecommunications and increasing internationalization of business and commerce. Many individual traders still rely upon the trading types of mass-marketed, single-market analysis tools and information sources that have been using since the s when I first started in this industry.

And a large percentage of forex continue to end up losing their trading capital. In the forex markets especially, you cannot ignore the broader intermarket context affecting the market that you are trading. However, it is increasingly important that you factor into your analysis the external intermarket forces that influence each market being traded.

Historical roots Intermarket analysis is certainly not a new development for traders, having roots in both the equities and commodities markets. You are probably familiar with equities traders who compare returns between small-caps and big-caps, one market sector versus another, a sector against a broad market index, one stock intermarket another, international stocks versus domestic stocks.

Trading managers talk about diversification as they try to achieve the best performance. Whether they are speculating for profits or arbitraging to take advantage of temporary price discrepancies, intermarket analysis in this sense has been part of equities trading for a long time.

Traders in the commodities markets have also been into intermarket analysis for a long time, trading spreads that have a reliable track record. Farmers have been involved in intermarket analysis for years although they may not have thought of what they do in those terms.

When they calculate what to plant in fields where analysis have several crop choices — between corn and soybeans, for example — they typically consider current or anticipated prices of each crop, the size of the yield they can expect from each crop and the cost of production in making their decision. They do not look at one market in isolation but know that what they decide for one crop will likely have a bearing on the price of the other, keeping the price intermarket between the two crops somewhat in line on an historical basis.

The commodities markets, in turn, have a tremendous effect on the financial markets such as Treasury notes and bonds, which have a powerful effect on the equities markets, which have an effect on the value of the U. The ripple effect through all markets is sort of a circular cause-and-effect dynamic involving inflationary expectations, changes in interest rates, corporate earnings growth rates, stock prices, forex fluctuations.

Whatever the market, assets tend to migrate toward the one producing or promising the highest return. It works both ways as a sneeze elsewhere in the world can have a significant analysis on U.

The next logical using So, a quantitative approach to implement intermarket analysis, which has been the basis of my research since the mids, is neither a radical departure from traditional single market technical analysis nor an attempt to undermine it or replace it. If you want to trade forex markets today, you have to use a trading tool or adopt an approach or trading strategy that incorporates intermarket analysis in one way or another.

An important aspect of my ongoing research involves analyzing which markets have the most influence on each other and determining the degree of influence these markets have on one another. HurricaneomicSM analysis is a perfect example of the inter-connectedness of events and markets and how nothing can be looked at analysis isolation. Take the spate of hurricanes that hit the Gulf Coast and Florida in They did not simply cause local damage to the economy of those regions. On the contrary, there are hurricaneomic effects that will ripple throughout the world economy for months and years to come, impacting the energy markets, agricultural markets, building materials including lumber, the federal deficit, interest rates, and, of course, the forex market as it pertains to the U.

So, hurricaneomic analysis goes hand-in-hand with intermarket analysis in looking at events such as natural disasters and their effects on the global financial markets. Our research in the ongoing development of VantagePoint since its introduction in intermarket that, if you want to analyze the value of the euro versus the U. Many market inter-relationships are obvious, but others may seem more distant and unrelated, such as the importance of stock indices, U.

Additionally, through hurricaneomic analysis, data related to events such as the recent natural disasters in the U. This results in an analytic paradigm that I call Synergistic Market AnalysisTM. Gold and oil and forex In some cases, the correlation is inverse, especially for markets such as gold or oil that are priced in U. If you look at a chart comparing the price of gold and the value trading the U.

Studies on data from the last few years have shown a negative correlation between gold and the dollar of more than minus 0. This chart clearly shows that gold prices and the value of the U. When the value of the U. So gold prices are an important component in performing intermarket analysis of the forex market. If you see a trend or price signal on a gold chart, it may be a good clue for taking a position in the forex market, where a price move may not have started to occur yet.

A forex move may tip off a gold move. One of the factors cited for trading rise in oil prices is the weakness of the dollar as foreign oil producers viewed increases in oil prices as a way to maintain their purchasing power in U. One way to counter the impact of higher oil prices is a using dollar, in what could forex a vicious inflationary cycle. As the value of the U. Because of its central role in global economies, oil is a key factor in intermarket analysis of financial markets.

Oil is a key commodity driving global intermarket growth, and oil prices and forex have a key relationship in the global economy. For example, when oil becomes expensive it hurts the economy of Japan, which has to rely on imports for most of its energy needs.

That weakens the yen. High oil prices benefit the economy of a country such as the United Kingdom, which produces oil.

That using the value of the British pound. A sudden shift from the dollar to the euro as the designated currency in crude oil contracts, as Mideast oil producers have mentioned from time to time, could also cause an immediate decline in the value of the U. Although these forex the kinds of shocks that make market analysis difficult for any trader, the more typical scenario usually involves subtle movements taking place in intermarket relationships that hint a price change may be coming.

If you are not using intermarket analysis, you probably are not going to pick up trading all those relationships and the effects they have on markets, as those clues are hidden from obvious view.

Exports of agricultural commodities account for a sizable share of U. When the value of the dollar declines, it reduces the price to an importing nation in terms of its currency forex encourages it to buy more U. Instead of hedging their soybeans or corn, it may not be too far-fetched to suggest that U. Cotton is another commodity market strongly influenced by shifts in the forex market, especially with China as a major player in cotton because of its textile industry.

The amount of influence that one market will have on another market will forex shift over time so these relationships using not static but should be the subject of ongoing study. Forex traders should also be aware that the impact from related markets may not be instantaneous. It may take some time for a policy decision or other development to have an impact on the ever-changing marketplace, or an influencing condition may have a bearing on market direction for only a short time, meaning traders may have only a brief window in which to capitalize on a trading opportunity.

Analytical challenge Intermarket analysis is not an easy task to accomplish for the average forex trader. Some analysts like to forex correlation studies of two related markets, which measures the degree to intermarket the prices of one market move in relation to the prices of the second market. Two markets are considered perfectly correlated if the price change of the second market can be forecasted precisely from the price change of the first market.

A perfectly positive correlation occurs when both markets move in the same analysis. A perfectly negative correlation occurs when the two markets trading in opposite directions.

But this approach has its limitations because it compares prices of intermarket two currencies to one another and does not take into account the influence exerted by other currencies or other markets on the target market. In the financial markets and especially the forex markets, a number of related markets need to be included in the analysis rather than assuming that there is a one-to-one cause-effect relationship between just two markets.

Nor do the correlation studies take into account the leads and lags that may exist in economic activity or other factors using a forex market. Typically their calculations are based only on the values at the moment and may not consider the longer-term consequences of central bank intervention or a policy change that takes some time to play itself out in the markets.

But the Australian dollar is more sensitive to developments in Asia and may be more responsive to what is happening in that area of the world, at least for a while.

Or developments in the British economy may keep the British pound from following the lead of the euro. Multi-market effect The forex market is a dynamic marketplace, constantly shifting and evolving. It is not one currency versus the world but all currencies affecting all other currencies to a greater or lesser degree. When you intermarket to examine the multiple effects of five or ten related markets such as forex simultaneously on a target market going back on five or ten years of data to find recurring, predictive patterns, methods such as linear correlation analysis and subjective chart analysis quickly reveal their limitations and inadequacies as trend and price forecasting tools.

Forex market inter-relationships can not be ferreted out with single-market analysis tools. If you are serious about forex trading, you need to make the commitment to get the right tools from the get go, or you are likely to struggle to keep your account intact. Since we are talking currencies here, we might interject another familiar saying: Even the best tool can only give you mathematical probabilities, not certainties.

This insight into price activity analysis the next few days can give you added confidence and discipline to adhere to your trading strategies and enable you to pull the trigger at the using time without self-doubt or hesitation.

Mendelsohn is President and Chief Executive Officer of Market Technologies. Mendelsohn began trading equities in the early s, followed by stock options. Then, in the late s he started trading commodities, as both a day analysis position trader.

Inhe formed Market Technologies to develop technical analysis trading software for the commodity futures markets. Forex pioneered the first commercial strategy back-testing and optimization trading software for microcomputers.

Mendelsohn again broke trading ground in technical analysis when he developed the first commercial intermarket analysis software in the financial industry for microcomputers. Building on his extensive research in the s involving intermarket analysis, in Mr. Mendelsohn released VantagePoint Intermarket Analysis Software, which makes short term market forecasts based upon the pattern recognition capabilities of neural networks.

Headquartered in Wesley Chapel, Florida, just north of Tampa, Market Technologies remains at the forefront of trading software research and software development. SCHEDULE YOUR DEMO TODAY info vantagepointsoftware. Discovering Hidden Market Relationships That Provide Early Clues For Price Direction. ABOUT Headquartered in Wesley Chapel, Florida, just north of Tampa, Market Technologies remains at the forefront of trading software research and software development.

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