Forex traders should utilize any tools that they find helpful in analyzing the markets. This will include fundamental, technical and market sentiment analysis. However, there is a fourth type of market analysis which many forex traders are unaware of or just simply ignore for one reason or another. This type of analysis is known as intermarket analysis.
What is Intermarket Analysis?
Intermarket analysis examines different markets and their correlations with one another. This helps forex traders identify a large move or a potential divergence. Two markets are said to be correlated when they move in tandem to one another.
Why Intermarket Analysis for Forex?
Intermarket analysis can be especially useful for trading currencies because the forex market underlies all other markets around the world. This is because the other markets are always priced in a currency, therefore one can look at the price for the SPX500 as essentially USD/SPX500. Also, the gold market can be looked at as XAU/USD.
This means if an entity outside of the United States, such as a hedge fund or another company or individual, wishes to buy SPX500 or place a long bet on the gold market, the buyer would need to sell its home currency in exchange for USD. The exchange of currencies was the last order of operations to complete the transaction which began with an order in an international market. Therefore, many times looking at movements in another correlated market helps forex traders forecast future movements in the currency markets.
On the other hand, once a forex trader has identified a well-correlated market for his or her chosen currency pair, it is important to not blindly follow the movements of the correlated market. Overtime markets which were once correlated can become uncorrelated. Also, there are various other factors which could be affecting forex market fluctuations. Therefore, one should always combine the various types of market analysis in order to obtain a more comprehensive view of the markets.
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Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.
Sources:
http://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2014/02/11/Unlock_Intermarket_Analysis_For_Your_Trading.html
