Forex & Other Markets (Part I)
Just as with the London close, there is no set way in which the New York afternoon market plays out. On more active days where prices have moved significantly, the lower liquidity can cause additional outsized price movements. So traders just need to be aware that lower liquidity conditions tend to prevail and adapt accordingly. However, the New York time between 3:00 PM EST to 7:00 PM EST is best suited for scalping with the counter trend strategy. Off hours between 3:00 PM and 7:00 PM EST is when all the world banks are closed. The U.S. banks are closing their doors and the Asian banks have not yet opened. This is a great time to scalp the market using a counter-trend strategy, because no larger banks are moving money (i.e. the markets) at that time.
Today we live in a global economy. Internet is just one example of it. You are browsing online searching for handbags. You like one but it is priced in Euros. You take out your credit card and make the payment without bothering about the foreign exchange transaction that you have made. Your credit card company is supposed to take care of everything. Todays global economy has become as simple as that. Why do investors need to exchange their domestic currencies for foreign currencies? Many want to invest in foreign assets. For that they need to convert their domestic currency into foreign currency. Companies involved in import and export business need foreign exchange to order new consignments or make payments. Multinationals need foreign exchange to repatriate profits. Big banks need foreign exchange and the list goes on. The forex market does no exist in a vacuum. You may have heard of other markets that exist like the gold, stocks, bonds, oil, futures and commodities.
Is there any relationship or correlation between these different financial markets and the forex market? There is a fair amount of noise and misinformation about the supposed relationship among these markets and the individual currency pairs. You can always find some correlation between two markets over time.
Crude oil futures contract trade on NYMEX. Gold futures trade on many exchanges. Dow futures trade on CBOT. S&P futures trade on CBOE. Stocks get traded around the world in different stock exchanges. NYSE is the most famous stock exchange. The forex market is 10-15 times bigger than all the worlds stock markets combined. There are many financial instruments and contracts that get traded in different financial markets all over the world. All these individual financial markets function according to their own internal dynamics based on data, news, positioning and sentiment. However, always keep this in kind that all the various financial markets are markets in their own right.
Each financial contract has its own characteristics, functions and markets where they trade. You should view each market in its own right perspective and trade accordingly. These markets will occasionally overlap and display varying degrees of correlation due to various underlying economic factors. Remember the sub prime mortgage markets. Crisis started in the US housing market when the bubble burst and real estate prices came down. It triggered the sub prime mortgage market crisis in 2006. From there it spread to the investment banks that have invested heavily sub prime mortgage securities. Many investment banks went bankrupt. The famous being Goldman Sachs! This made the US stock market crash. The contagion spread to Europe. In the end it developed into a global financial crisis. At times it is just a chain reaction.
Lets discuss some major financial markets and see what conclusions we can draw for currency trading. Its always important to be aware of whats going on in the other financial markets.
Gold: The combination of currency trading and gold trading is ideal. Both are almost perfect hedges. Gold is considered to be an alternative to the US Dollar and a hedge against inflation. Gold is commonly viewed as a store of value in times of economic and political instability and uncertainty.
Over the long term, the relationship between Gold and US Dollar is mostly inverse or negative. A weaker US Dollar is generally accompanied by higher gold prices and a stronger US Dollar is accompanied by lower gold prices.
This makes short term relationship between the gold prices and US Dollar generally tenuous. However, in the short term, each market has its own dynamics and liquidity. Overall, the gold market is much smaller than the forex market.
Extreme movements in the gold prices tend to attract currency traders attention and usually influence the US Dollar in a mostly inverse fashion. At the same time, gold traders tend to keep an eye on whats happening to the US Dollar.
Oil: A lot of confusion is usually spread on the relationship between oil and US Dollar and other currencies like CAD and JPY. Correlation studies show no appreciable relationship to that effect in the short run which is where most of the currency trading is focused. The idea behind these theories is that if the country is an importer of oil, its currency will be hurt by the higher oil prices and helped by lower oil prices.
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Try These 1500 Pips A Day Forex Signals From Heaven. Develop Your Own Forex Trading System!
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