A look at Currency Market Synchronization 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 and commodities, but also Forex. There are a variety of events in any given environment that could affect the values of items in any of these markets. However, what we want to understand is how the events and movements in other markets can affect movements in the Forex market. Insight into this phenomenon will help people to learn forex trading online better.

Spreading risk is an important concept in investing circles. You want to ensure that you spread your investments, or at least the basis for investments, across a variety of markets and sources. 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. One might look at this and work out that the net result would be zero, but savvy investors obviously expect to get out of the losing position quickly, and stay in the winning position for longer.

The point here is that the ideas above can be applied to trading Forex, even without directly owning assets or accounts in the other markets. For example, take the relationship between commodities like Gold and Oil, and currencies from Australia and Canada. Canada is a large producer of Oil. It’s the number one base of their economy. They also export a lot of this commodity to the United States. When Oil is on the rise, it is 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 and not so good for the Dollar. Also, when US Equities are doing well, the Dollar tends to gain on the Japanese Yen because people would sell the Yen for Dollars so they can buy US Based Assets which offer a high rate of Interest than Japan.

The thing to note here is that this correlation is not absolute. There are times when it just won’t hold, when more important factors are at work, such as in a time of Economic strife when predictability in the markets reduces and everyone is afraid. These correlations will often reverse at a moments notice without much warning. . This was the case in January 2009, when Gold and the Dollar began to move up at the same time. Some fundamentalists claim that there is no basis for the correlation between the dollar and Gold, for instance. Still, correlations like this can be quite useful. While it’s possible to swamp yourself in information, you shouldn’t disregard anything that might help. I think there are times when it is best to go with the established trends. Like any other situation, the trader has to be constantly vigilant and pay attention to the surroundings. As long as you manage your risks accordingly, you will be able to stay in good shape, regardless of what happens.

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