If you want to enjoy currency trading success, you need to catch and follow trends and spot turning points and this tool will help you – it’s an obvious tip in many respects but most traders simply don’t use it, so here it is.
It’s to look at other markets that impact on the currency you are trading and for the purposes of illustration let’s look at the US Dollar.
The dollar is a net importer of energy and high energy costs hurt it and the main one we are referring to here, is crude oil. In recent history when crude has hit high levels (and we have had recent tests of $100 a barrel) it has hurt the dollar and the retreat from this level has seen the dollar stabilize and rise.
Tops in the oil market recently have warned of dollar rallies.
Another major factor is interest rates.
Recently the dollar has been hurt by the perceived view that interest rates will be cut and you can get an idea of how much by looking at interest rate futures. When the interest rate futures rally too hard to fast and then fall, you can often see the dollar rally.
Why? Because traders get ahead of themselves – the recent rally in dollar euro was preceded by 100% consensus that interest rates will be cut by 50 bps (probably true) but gave 50 – 50 that rates would be cut by 75 bps (unlikely) the level of interest rate cuts factored into the market was overdone and prices in interest rate futures fell and the dollar rallied.
Tops in oil and interest rate futures can be used to warn of dollar rallies.
Another important variable is the stock market. Weak stocks hurt the dollar and strong stock markets support it – so watch it in fact if you want another tip:
If you are trading long term trends and only want to look at the prices of currencies once a day, do it just after the stock market closes. This closing price is always significant and while currencies trade 24 hours they are effectively thinly traded until Tokyo opens and the US stock market close sets the tone for the next day
Other currencies are also affected by outside influences:
The Canadian Dollar – Is a net exporter of oil and high prices of oil and other commodities are supportive of the currency
The Australian Dollar – Australia is a big producer of gold and when gold prices are high it supports the currency.
By looking at other markets that are important to a currency, you can often spot whether trends are going to continue or reverse. While it’s obvious that currencies don’t move in isolation, many traders do not bother to look at other markets for clues – if you do, you can get a trading edge.
A trading edge is what forex trading is all about and if you research this tip further, you will find it very useful as part of your forex trading strategy for bigger profits.