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    Thread: What is intermarket correlation?

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      Default What is intermarket correlation?

      What is intermarket correlation?
      How does one forex pair or instrument correlate with other pairs or instruments?
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      Correlation is something that happens constantly in the forex market, sometimes we are aware when it is taking place and many times we are completely oblivious of its existence, let's see how this works with two pairs, I will like to sight recent examples of what has happened in price of both eur usd and usd jpy, as at yesterday we saw a fall in EU while in the other hand we experience a rising uj, that is a perfect example of what it means for pairs to correlate although in this case it was opposite correlation, we have both positive and negative types where two currency pairs are either moving in same direction or in divergence to each other, we need to be aware that some times two pairs that were hitherto negative can suddenly move in the same way.


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      In as much as correlation do exist in the forex market, we must recognise that this is not a perfect relationship and it can never be, if for instance we say that two currencies correlate, they can not be found at any point in time to move at exactly the same pace, there is a time lag between when one happens and the other responds. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1.Perfect positive correlation implies that the two currency pairs will move in the same direction 100% of the time. Unfortunately this is not the case as price movement is highly unpredictable by anyone, so correlation itself is not a holy grail strategy if that is what someone is thinking about right now.
      Perfect negative correlation means that the two currency pairs will move in the opposite direction hundred percent of the time, however there are many factors that will alter this from exactly happening in the way it has been explained here which we must take note of.


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      Intermarket correlation Is the relationship between two or more variables, in other words, of the degree to
      which the movements of two currency pairs are related. For example, if two currency pairs have a high correlation, their prices tend to rise and fall in at the same time

      For example, the Australian Dollar (AUD) and the Swiss Franc (CHF) often move together with gold prices because Australia is one of the top gold producers in the world and Switzerland has more than 25% of its reserves backed by gold.

      Intermarket analysis techniques can therefore provide a useful long term forecasting method for investment
      market analysts and business managers.


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      Quote Originally Posted by Mez Da Whiz View Post
      What is intermarket correlation?
      How does one forex pair or instrument correlate with other pairs or instruments?
      Intermarket analysis (correlation) is a method to analyze a market while also considering other markets.
      So if you are trading the forex market then you should consider the energy market (OIL), metal market (GOLD), stock index market (usually DOW JONES INDUSTRIAL AVERAGE) and also the treasuries market (U.S. BOND)

      When it comes to correlation though, there are only two of them and they are the positive correlation in which the two market will move into the same direction and the other one is the negative correlation which means if market A move up then market B will move down. The simplest case is the US dollar market with the gold market if the U.S. dollar is strengthening then the GOLD market will usually go down. Also another example is the correlation between the U.S. dollar with the stock market.... when the dollar is getting stronger the stock market will also rise up.

      Correlation comes in percentage too, if the correlation is high then the number is positive and high which means the market B mirrors the movement in market A. If the correlation is low then it's possible to have high negative correlation which means if market A goes up market B will go down.

      Comparing the correlation between pair is also the same but it's not intermarket in the real sense because every currency pair that you see on the trading platform is traded on the same market and that is the forex market.


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      What you call intermarket correlation is the process by which analyst intends to discern some relationship of sort between two currency pairs. Currency pairs can be inversely or directly correlated. Currency pairs are said to be directly correlated if movement of a pair would most oftenly dictate the same movement of the other pair. And vice versa, currency pairs are said to be inversely correlated if movement of a pair would mean the reverse movement of the other pair.

      It could be of great benefit if we can use correlation analysis in order to predict the trend. Knowing the correlation of the currency pairs, the analyst can more or less confirm his analysis of the trend of a pair at the same time with the correlated pair if their movement is according to their correlation. For example, we can expect the eurusd and the usdjpy to be inversely correlated being opposite side of the US dollar. However, sometimes the currency pair may deviate from the correlation due to some fundamental basis in the currency.


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      I will talk about the Forex market where there is correlation between the movement of some pairs and others . I can benefit from this correlation to confirm some deals
      As an example
      eurusd and usdchf have reverse correlation
      If eurusd in buy Area , and usdchf also in buy area
      In this situation, i chose not to enter into any trade in them
      Also can take advantage of the dollar index analysis to analyze all dollar pairs
      The Insta platform offers a chart of the dollar index and can benefit from its analysis


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      Intermarket correlation means that one pair is behaving somehow because another is exhibiting some movement, you see forex is not independent meaning every thing is connected in some ways, even the cross pairs are affected when there is a movement that is highly volatile in the major pair.

      A typical case study is the bearish movement of GBP JPY yesterday being the 23rd day of may 2018, there was a break out in GBP USD which ultimately dragged gj alongside it, ordinarily this is not supposed to be so because there is no direct relationship between the two pairs.

      The above scenario happens in terms forex charts all the time and goes to buttress the fact the correlation is always present whether we understand what is causing it or not.


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      Intermarket means the relationship and interaction between different types of markets with their respective trading instruments.... Price movements of these different types of markets affect each other, for example between the stock market and commodity markets, between commodity markets and the forex market, and so on....
      Professional forex traders always apply intermarket analysis methods to maximize profits and reduce risk due to the influence of one type of market to the forex market... In addition, forex traders can also hedging trading positions by entering on other types of markets....

      The forex market is not isolated and self-sustaining, but part of the dynamics of the global economy and the various markets that influence it.... By looking at the movements of different types of markets we can get direction for movement of a currency pair....
      In general, the analysis of intermarket on the forex market is done by observing the movement of stock price index, bonds and prices of the world's major commodities.... By knowing the influence of each type of market to the forex market we can get a signal to predict the direction of movement of a particular currency pair....


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      Think of the forex market as a complex interconnected system, see it as the human body that is all connected through the brain, when something happens to your leg for example, it is interpreted by the brain and you immediately shout or show some emotions, that is because everything is correlated in your body system.

      This is the same description that we can give to the forex market, there is correlation taking place every day but we cannot see this happening simultaneously, one might respond to what has happened much later which is why we see that you can enter some trades which might all end up being losses because something was triggered somewhere else.


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