Forex And Other Financial Markets (Part I)
On more active days where prices have moved significantly, the lower liquidity can cause additional outsized price movements. Just as with the London close, there is no set way in which the New York afternoon market plays out. So traders just need to be aware that lower liquidity conditions tend to prevail and adapt accordingly.
The forex market does no exist in a vacuum. Why do investors need to exchange their domestic currencies for foreign currencies? You may have heard of other markets that exist like the gold, stocks, bonds, oil, futures and commodities.
Forex is only one market. It may be the largest and the most liquid global financial market. It is an over the counter market. There are many other financial markets that may not be as global as forex but nonetheless they perform important functions. Thinks about crude oil futures market at NYMEX! Without the supply of oil, the global economy will come to a screeching halt. Are crude oil prices and currency prices interlinked? 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.
These markets will occasionally overlap and display varying degrees of correlation due to various underlying economic factors. So you should view each market in its own right perspective and trade accordingly.
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.
However, in the short term, each market has its own dynamics and liquidity. This makes short term relationship between the gold prices and US Dollar generally tenuous. Overall, the gold market is much smaller than the forex market.
If you are a currency trader than it is not difficult for you to trade gold also! Al most the same technical analysis tools are used in gold trading as in currency trading. 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: The global economy runs on oil. In 2008, crude oil prices skyrocketed from $60-70 to almost $150. It was being predicted at that time that oil prices will reach $200. It made the whole world jittery. Oil prices rise is a cause of inflation in almost every economy in the world. Then all of the sudden the bubble burst in a few months. Were the hedge funds involved in the sudden increase in the oil prices and than their collapse? 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 is a Harvard University Graduate. 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!
Tags: business, CBOT, commodities, Crude Oil Futures, Crude Oil Prices, Currency, currency pairs, Currency Prices, Day Trading, Domestic Currencies, Dow Futures, finanacial markets, finance, foreign currencies, Forex, Forex Market, Forex Signals, futures, Futures And Commodities, Futures Commodities, Futures Contract, Futures Market, Global Financial Market, Gold Futures, Gold Stocks, Internal Dynamics, Investing, Liquidity Conditions, mutual funds, New York Afternoon, options, real estate, stocks, Stocks Bonds, Trading, wealthPosted in
