The Forex trading Market does not exist on it’s own. it is a part of a Global Marketplace and, as such, is subject to influence from things that affect these other markets. 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 about forex trading 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. There is also the idea of hedging. Basically, it involves trading in the opposite direction e.g. buying another asset when you have a sell position opened, to smooth out the risk. 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. A simple example is the correlation between Oil and 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 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.
This can be applied to a lot of other forex pairs. You can do some mixing and matching as well. Rising Gold tends to be good for the Australian Dollar and bad for the US Dollar, so one can buy the Australian Currency against the Dollar under such circumstances. 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.
You have to be wary though, as this relationships don’t always stay the same. 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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