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.
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.
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.
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.
However, its always important to be aware of whats going on in the other financial markets. Lets discuss some major financial markets and see what conclusions we can draw for currency trading.
Gold: Gold is commonly viewed as a store of value in times of economic and political instability and uncertainty. Gold is also considered to be an alternative to the US Dollar and a hedge against inflation.
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.
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: A lot of confusion is usually spread on the relationship between oil and US Dollar and other currencies like CAD and JPY. 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. Correlation studies show no appreciable relationship to that effect in the short run which is where most of the currency trading is focused.
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.
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.
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.
However, its always important to be aware of whats going on in the other financial markets. Lets discuss some major financial markets and see what conclusions we can draw for currency trading.
Gold: Gold is commonly viewed as a store of value in times of economic and political instability and uncertainty. Gold is also considered to be an alternative to the US Dollar and a hedge against inflation.
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.
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: A lot of confusion is usually spread on the relationship between oil and US Dollar and other currencies like CAD and JPY. 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. Correlation studies show no appreciable relationship to that effect in the short run which is where most of the currency trading is focused.
About the Author:
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!
