DailyFX Tips & Picks: How to quickly gain an edge in a one-eyed market
MOST traders tend to stick to a single market and trade accordingly. But they could gain a great deal by leaving this attitude behind and looking at other markets at the same time.
Did you know that, a majority of the time, euro-dollar and sterling-dollar trade in the same direction? Yet people still trade them independently. If these currency pairs agree on the trend, then trading them together will usually generate a higher winning ratio. If their trends don’t agree, then not trading them at all or sticking to euro-sterling is usually the solution. Trading dollar-yen is made easier if the trend is supported by a similar trend in euro-yen or sterling-yen. Planning to sell the Australian dollar-dollar? Then keeping an eye on New Zealand dollar-dollar tends to help.
So the next time you see that sterling-dollar had a jolt to the upside, but the euro-dollar remains flat, anticipating and positioning yourself for a move higher in euro-dollar is reasonable.
The phenomenon above is called correlation, and swings from a maximum 100 per cent positive correlation to a 100 per cent negative correlation. If the correlation is near zero, the trader could trade the currency pairs independently.
What are the most current market correlations? See our update https://bitly.com/CityAM1
Alejandro Zambrano is a currency analyst at DailyFX.
Azambrano@dailyfx.com
Twitter: @AlejandroDFX