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Category Name: Trade Execution

Intermarket Relationships

By: San Diego BOBL from the Global-View.com forums

Intermarket Relationships

The Forex market in cash currencies is enfluenced by a number of other markets and relationships. Traders gain an advantage in their market viewpoint if they understand and consider these relationships in their trading decisions. Often times an external event involving physical commodities precurses a larger move in the currency market. Financial instruments and physical commodities that play a major role in currency trading are, but not limited to, European, Asian, and US debt instruments. These instruments construct the vehicle commonly referred to as the "carry" trade. In this instance, a debt instrument is conveyed from a foreign source of cheaper debt service to a country paying more for debt/per USD. An example and multiyear phenomena was the carry trade of borrowing Yen and placing that money in USD treasuries resulting in a surplus arbitrage. It was literally a trade with a locked in carry and conveyance. This is obviously valuable information and is an ongoing source of trade relationships every day. The key is to be in sync with the winding, or building of the position, and the lay-off (unwinding).

Other key influencial relationships include oil and all it's byproducts, the industrial and precious metals, and the grains to name the most obvious. Typically, if crude oil and gold are moving up, then the USD is moving down. This is not written in stone, however, the keen trader will study interest rates, oil products, and metals for levels of influence, and incorporate that in Forex speculation. The simple fact is that money being allocated to products must convert to the market standard, which is almost universally the USD currently. The USD, as well as other currencies, "float" in the motion of the market. Can you imagine what 1913 minted dollars would look like today buying $100/barrel crude oil? Not a pretty picture.

One of trader's main jobs is to discover, or uncover, the "character" of the market. This means in simple terms... what is driving the market? As we all know, the market goes up, down, or sideways. Being in line with this action is the most consistent producer, however, there are times to "fade" the market. Again, by understanding "why" the Forex crosses are acting like they are is an advantage that can be integrated a trading approach. Often, this information, together with a market profile (which shows level of financial commitment at specified prices) will lead to correct deductions about the future of market activity.

Traders today can display several lines of information in one graphic to correlate market behavior. Global-view often produces those charts for our purview. I choose some different graphics for my style... like spread charts. A trader can increase their understanding of what is taking place by "spreading" a discount rate line graph to a USD or EURO line graph. You can add Bunds or Libor or whatever. It is up to the trader to find a comfort zone whereby information is an aid or allie versus analysis paralysis. A suggestion would be to focus on one market market's influence on Forex and once harnessed, expand to another. In the end result I believe the trader will have a much better understanding of the functions and machinations of Forex Market.

WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.