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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 A big half of information is outdated, but anyway let me recommend you to read it like a classics of the genre.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.

    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. #31
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    there are some cross currencies can ive us good patterns to trade on better than essential or basic currencies . for example i see that the aud . cad is a very good pair and may be it is one of the best poairs to trade ever all . this can give good signals without hesitating every more , i see it remarked with stability and good tren d attitude

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