Using Correlations of Equities and Commodities as Live Indicators in Forex 1



Hello all fellow forex koalas!

Been a great trading day yesterday as stocks tumbles across continents. S&P500 index was down more than 20 points at a time and DJIA (Dow Jones Industrial Average) was down more than 200 points!!

Now we are forex traders but why am I mumbling about stocks indices you ask? Before you shift your attention to the funny videos on youtube.com, please bear with me for a while as stock indices, especially the American S&P500 and DJIA, MATTERS A WHOLE LOT TO US! To make money in forex, we need to widen our horizons 🙂

In this article, i will be sharing in the perceptive of an EUR/USD Trader.

I’m sure everyone are familiar with technical analysis which involves MAs, Stochastics, RSI and even one named similar to a greasy fast food chain called the MACD. ( ha! ) For some these serve as technical indicators and they swear their life (account) on it. However we are not interested in that as it makes our chart looks like a child’s coloring books. So I’ll present to you “LIVE INDICATORS”.

The S&P500 consists of 500 large-cap common stocks in the US blah blah blah…… Now the interesting stuff is it’s apparent correlation with the EUR/USD pair we are trading at the moment. This has to do with something called risk aversion/appetite but that’s another article in itself. Now open up the chart of the EUR/USD and the chart of the S&P500 futures. Yes I know some brokers don’t have it but you can easily google for it on the internet. Set your chart time frame to lower timeframe, say M15 and you should see the correlation easily. Now how to use it to our advantage? Usually, the S&P500 futures and EUR/USD loves to play catch up with each other. Hence you can use it as a filter to avoid potentially bad trades. For example, the S&P500 futures are bullish at the moment and you thinking of shorting EUR/USD, since it doesn’t go the same way, you know something is not right and it’s probably wise to reconsider your decision to short the EUR/USD.

Now on to another live indicator, the spot price of GOLD. Now some might have the pair XAU/USD on your platform, and you wondered what is that XAU currency. Actually it’s the price of spot gold denominated in US Dollar. Now the logic is simple, “Gold Price Up=Dollar Index Down”. This live indicator usually works better on the higher timeframe such as Daily chart.

Traders Beware: What I have written are the basic rules and guidelines in helping you to trade and make possibly better decision. However as they always say, rules are mean to be broken! There are times when this correlation doesn’t work in your favor. As always DYOR (Do Your Own Homework) before putting newfound knowledge to practice.

Next time I’ll do an article on the Magic Round Number Magnet. If anyone has any questions I’ll be happy to answer.

All the best in trading Forex Koalas!

Marvin.

Marvin is a Forex Koala and usually trades intra day with an extra dose of fundamental analysis! Connect with him on our facebook page.

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  • Elmar Silveira Votri

    Thank you . I´ll give a special study to it this weekend!