As Forex traders, we can use intermarket analysis to our advantage when it comes to choosing trades and trading opportunities. In the financial markets, everything is correlated and interwoven. And in Forex especially, because of the 2 currency pair structure – each currency pair has two components – this is even more important.
Let’s take a look at a recent example on the AUD/USD and a setup we discussed on Sunday in our watchlist. The AUD/USD has two components to it obviously: the USD and the AUD. At the same time, the AUD and Gold are positively correlated and if you trade the AUD, you should keep an eye on Gold as well.
Our bias on Sunday for the AUD/USD was long but we are lacking context and confirmation. Over the past 2.5 days, the USD-Index moved back into its resistance at 103.50 where it showed a classic squeeze pattern – this is something that makes a bearish move likely. Gold, on the other hand, moved higher and showed a textbook break and retest pattern on the daily chart. A bearish USD and bullish Gold, together, means bullishness for the AUD/USD. In the video below, I show you how to add technical and trend analysis to this mix and how to analyze those three markets together in context going top down.
This is called intermarket analysis where we connect the dots by looking at the individual components and then form a trade idea based on the different factors. The great thing about being a Forex trader is that we always trade two currencies against each other. If we can identify two catalysts, the USDX squeeze and the Gold break-and-retest, like in this example, we can significantly improve the odds of finding a higher probability trade. Now if the USDX doesn’t sell off but trades sideways, but Gold keeps up the momentum, we could still see a decent follow through on the AUD/USD. Or, if Gold drifts only sideways but the USD sells-off, it might be enough for the AUD/USD to move higher still. We don’t need to be right in 100% of the individual analyses because of the two currency dynamic in Forex trading.
At the same time, being aware of the drivers and the correlations between markets makes trading much easier. You don’t need to understand each pair by itself and you don’t have to go all the different Forex pairs and start your analysis from scratch on each one as long as you understand the bigger picture and which the catalysts are.
The bearish bias on the Dollar as long as the squeeze holds can also be used on other Forex pairs such as the USD/JPY and USD/CHF short ideas from this week’s watchlist. And the bullish Gold bias could help other safe-haven Forex pairs as well.
I highly recommend that you know which markets are correlated and which Forex pairs are driven by which other markets and then make that a part of your weekly/daily review process.
And once we combine that with regular top-down analysis and technical analysis, we can form very robust trade ideas like I explained in the video below.
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