Do you know your correlations? (part one)
Coming from a futures trading background has served me well in my forex journey. I realize that not all forex traders are aware of the future-forex correlation or how to use them properly.
There are two ideas to remember here. For me, most of my analysis and trading in the forex involves just seven pairs. I divide them into two groups. First is the "dollar correlated" majors:
EUR/USD
USD/JPY
GBP/USD
USD/CHF
The second group is comm-dolls, the commodity currencies:
USD/CAD
AUD/USD
NZD/USD
...I know there are plenty of other great trading pairs but for me, I like to keep my basket of currencies focused on those pairs that I can use the secondary confirmation of key futures contracts like the
U.S. Dollar Index
Dow
crude oil
gold
Fed Funds
continuous commodity index
I call them my "market pulse".
I like to trade the during the overlap between Frankfurt, London, and New York which makes my active trading time between 7am EST and Noon EST.
(In a later post I will show you the statistics behind pip movement on these pairs.)
There one common thread that connects the pairs I trade -- the most traded pairs in the forex universe -- and that's the U.S. Dollar.
Think about it. The three most traded pairs, known more commonly as the "majors" are he EUR/USD, USD/JPY, and GBP/USD. Currnecies that trade against the U.S. Dollar make up for than 80%-plus of daily turnover.
All forex traders should understand what effects the pairs they trade, and if your trading basket looks anything like mine, then you must know where the dollar is trading and what effects it.
This means understanding where the key decision levels are on the chart and how each currency trades against the dollar. Initially you can look at the relationship between each pair and the dollar index and determine if it's sympathetic or inverse.
In part two I will explain the relationship between the dollar and the market pulse and then in part three we will look at the each of the seven pairs I trader and the relationship back to the market pulse.
Related Posts:
- A current look at U.S. Dollar Correlations (Do you know your correlations? part two) 16:46 26 January 2009
- Market Pulse & The Funnel Mindset (part one) 10:33 26 May 2009
- Why I think you should be watching crude oil (and the Dow) closely. 15:15 11 August 2011
- Watching the Dow and the Dollar-Yen 19:46 20 January 2009
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Forex Blog: Chartology
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