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Thread: The сross-market analysis and correlation between financial markets

  1. #1
    Super Moderator Gulfstream's Avatar
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    The сross-market analysis and correlation between financial markets

    The сross-market analysis it’s the topic in it’s own right. It’s important for all traders, doesn’t matter if you trade on Forex or on the other markets. The understanding of interconnections between financial markets gives to trader conception about market movements and the reasons, why they happen. Everyone should know this, even if trader deals only with usage of technical analysis or other types of it.
    The сross-market analysis studies correlation between financial markets (four major asset classes: stocks, bonds, commodities, and currencies). The main goal of intermarket analysis is price movement forecasting. This analysis works not just for long- and medium-run strategies, but also for intraday trading.
    However, the topic of сross-market analysis isn’t in largely disclose in modern financial literature. Only one book, written 30 years ago, gives us knowledge
    and experience in this direction - “Intermarket Analysis: Profiting from Global Market Relationships” by John J. Murphy. A big half of information is outdated, but anyway let me recommend you to read it like a classics of the genre.
    Murphy reckoned intermarket analysis to the technical analysis feasibly cause he was classical in this direction. In my opinion, intermarket analysis(IA) is a part of fundamental analysis, because IA explores exactly reasons of price movements (nevertheless, charts are also used for this).
    In this thread we will try to discuss IA in simply way in order to help each beginning trader to straighten out.


    Introduction
    It happened in 2010. In one website I have found a posting from beginner in trading. He was very surprised when one day he opened index chart on small timeframe intraday and discovered that a good half of currency pairs just copy this index movement (for example, AUDUSD and other). Then he realized why currency movements are so sharp and are changeable from one side to another. That was a big revelation for him. I gave him advice to continue learning stock indexes, if he want’ to become a professional trader.
    Beginning trader doesn’t understand why currency pair price is so dynamic within a day or during a week. Primarily they get to know about news at the market and
    macroeconomic indicators outputs. They follow this news and think, that it’s a real fundamental analysis.
    After that beginners extend their knowledge and got to know about monetary factors which also affect the market. For example rate growth expectations lead to currency's value growth.

    So, the main factors, affecting currency value, are:

    1.Differrence in Interest Rates between the currencies of two countries. Investment in assest of country, whose interest rate is higher, gives more income and that means that the currency value of this country is more expensive and demanded.
    2. Interest Rate growth expectations lead to growth of the exchange rate (and vice versa, rate's fall makes currency value cheaper).
    3. Quantitative easing implementation (QE) makes value of currency to go consistently lower during the whole period. Expectations of QE fulfilment makes currency of this country more attractive and expensive.
    4. Other monetary and fundamental factors. For example, debt crisis in 2011-2012 led to sharp euro weakening .


    However, during the day currency price is defined by other factors:
    1. News distributing and and macroeconomic indicators performances.
    2. Intermarket relationships. The impact of other markets on the movement of exchange rates.

    The main classifications financing assets market types:

    The four main assets classes are:
    1. Currency
    2. Commodity assets
    3. Stocks
    4. Bonds


    According to classification above, the four main market types are:
    1. Foreign exchange market
    2. Commodity market
    3. Stock market
    4. Bond markets
    Let us look more closely on each financing asset and market later in the thread.



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  2. #21
    Trader techboy's Avatar
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    Cross market or correlation analysis does not have so much bearing in trading because what we see on the chart are all things in the past, but we cannot really predict where the market will move possibly in the next hour or tomorrow, market is very unpredictable in nature and it cannot be predicted accurately by any method, we can use all the tools available for trading but it will not guarantee success to every trader.

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    " Trading is 70% Psychology, 15% Risk Management and 15% Strategy ! "

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    Trader Sascha's Avatar
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    Quote Originally Posted by Gulfstream View Post
    3. High-yield commodity currency (like as AUD, NZD, RUB, MNX etc.) also are included to the list of risky assets. The higher base interest rate of the country is - the higher profitability of
    according to this, i had few times tried to trade with some of those high-yield commodity currency in some trading contests and the results were very satisfying. that's right the risks of trading with them is very high because of big spread and movement. i also want to add another currency which has good movement yet risky it's TRY or Turkish Lyra which also has awesome movement.

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  4. #23
    Trader layigold's Avatar
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    Quote Originally Posted by Gulfstream View Post
    II. Safe Assets. Investors prefer this assets during the geopolitical tensions, wars, disasters, etc.

    1) Japanese Yen. This funding currency is using for carry-trade (description is below).
    2) Government bonds of USA, Germany and other countries with highest
    credit rating. Their revenue is minimal, but investors buy them because of their safety.
    3) Gold is traditional safe-haven assets for investor.
    4) Swiss Franc. During last years SHF has largely lost its attractiveness as safe assets due the high overbought.
    5) US Dollar. Almost entirely had lost all investor’s trust as safe-haven asset after four times increasing of base interest rate up 1.25%. Today USD is traded closely to high-risk asset category.
    Let me start by appreciating you for sharing this because it is not only good for beginner traders but to those of us who have been in trading business for quite number of years as we all know that learning remains a continuous process. In the recent past , there was geopolitical tensions between US and and North Korea and that brought down the price of US 10 year bond down seriously , dollar index also crashed and safe haven currencies like Japanese yen , Swiss Franc and gold ( Yellow metal) appreciated much . This agrees perfectly with the lectures you have given us here and any trader who had perfect understanding of this would have positioned himself to making good use of that opportunity. This is a thread that attracts my thumb up because it is very educative and insightful

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  5. #24
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    Forex trading business have been unpredictable for decades, is a business where you cannot possible state or say where it is probably going to but with good analysis, you can be able to define the possible ways it might go. Forex trade is a business where analysis is of the most necessary need, so that is why we need to understand the business very well before trading in it.

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  6. #25
    Trader Lyon's Avatar
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    Quote Originally Posted by chioma View Post
    Forex trading business have been unpredictable for decades, is a business where you cannot possible state or say where it is probably going to but with good analysis, you can be able to define the possible ways it might go. Forex trade is a business where analysis is of the most necessary need, so that is why we need to understand the business very well before trading in it.
    There are the traders that has the nice concept of making good trades, they make money. The thing we need to know about forex is that in as much as you know how it works. In as much as you have learned and built a good trading concep, it will lead you to knowing how to predict the market, how to do the right thing.

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  7. #26
    Trader musiliu's Avatar
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    correlation between two instruments is very common especially for related pairs like the Aud/usd and Nzd/usd. you can use correlation between two pairs to your advantage by using it to confirm trade setup. Trading signals will have a higher chance of returning profit if the signal is shown on another correlative pair, you can avoid some trades that are not confirmed on a correlative trading pair

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    Always have realistic DREAMS!

  8. #27
    Trader Coffee's Avatar
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    Quote Originally Posted by Gulfstream View Post
    So, the main factors, affecting currency value, are:
    1.Differrence in Interest Rates between the currencies of two countries. Investment in assest of country, whose interest rate is higher, gives more income and that means that the currency value of this country is more expensive and demanded.
    2. Interest Rate growth expectations lead to growth of the exchange rate (and vice versa, rate's fall makes currency value cheaper).
    3. Quantitative easing implementation (QE) makes value of currency to go consistently lower during the whole period. Expectations of QE fulfilment makes currency of this country more attractive and expensive.
    4. Other monetary and fundamental factors. For example, debt crisis in 2011-2012 led to sharp euro weakening .
    all the factors mentioned above do have a great impact both in the short and long term. markets usually react more aggressively when a country with a currency raises or lowers its interest rates. changes like this are very disturbing the growth of the value of these currencies because market participants will make drastic changes with their ability to use a lot of money to change the value in the market.

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  9. #28
    Trader layigold's Avatar
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    It is just very few traders that are familiar with cross analysis in forex trading because it is just only the fundamental and technical analysis that gain much popularity but that notwithstanding , cross analysis carries the same level of importance most especially when a trader is very good at using it to analyze the market . This involves what operates in the field of the stocks , share, yields and bonds market to determine how that will impact the currency market . I have been closely watching the charts of US 10 year Bond yield and when it appreciates , it strengthens dollars against major basket of currency

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  10. #29
    Trader Silhouette's Avatar
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    Quote Originally Posted by layigold View Post
    It is just very few traders that are familiar with cross analysis in forex trading because it is just only the fundamental and technical analysis that gain much popularity but that notwithstanding , cross analysis carries the same level of importance most especially when a trader is very good at using it to analyze the market . This involves what operates in the field of the stocks , share, yields and bonds market to determine how that will impact the currency market . I have been closely watching the charts of US 10 year Bond yield and when it appreciates , it strengthens dollars against major basket of currency
    People tend to focus on few things they know and understand, that's all that makes them not using another type of analysis and try to do this cross analysis in forex trading. Mostly thought it's because not so easy to implement both techincal and fundamental analysis at the same time like combining exact numbers of precise calculation with news spread along with rumors in fundamentals.

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  11. #30
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    Cross currency correlation actually is very important and they will move the market quite a lot. In the past we might even heard about the cross currency correlation between CHF and EUR. As long one of them move then other one will follow. That is one of the common thing many know already in the market. But those things might not be correct for now because CHF has already being unpeg with EUR due to the QE started by Euro.

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