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Stock Market and Forex Relationships:
How Stock Movements, relate to Forex Trades
Stock market fluctuations are viewed by occasional investors and proactive traders. Frequently, the movements of the stock markets offer clues about imminent movements in forex trading. Illustrated Below is a chart of general tendencies that a trader or investor that is familiar with stock trading can use to guide them in forex trades.
When the stock market is said to be in a “risk on” mode and prices on the rise, generally you tend to see these currencies below trade in noted general directions.
AUDUSD NZDUSD and EURJPY all going up
USDCAD EURAUD and GBPAUD all going down
For example, if the stock market moves higher, you tend to see the AUDUSD move higher as investors seek risky assets. Risky assets include the stock market and higher yielding currencies which currently are the AUD and NZD.
At the same time, as investors seek out ‘risky’ assets, currency pairs like the EURAUD and GBPAUD tend to fall as traders look to earn the large daily dividend those pairs offer. This is known as a Carry Trade Strategy.
On the other hand, if traders are in a “risk off”mode and are averse to risk, the opposite of these relationships tend to occur.
AUDUSD NZDUSD and EURJPY going down
USDCAD EURAUD and GBPAUD going up
For example, if the stock market is in a downtrend, then a currency pair such as the USDCAD tends to move higher as traders buy the USD for its safe haven status.
Regardless of the movement of the stock market, there generally exists a currency which you can buy. Now, the key is identifying a high probability area to time an entry in the trade.
Always keep in your mind correlations move in and out of favor with each other. So a price of an instrument is not neccessarily always going to move tick for tick with the other related instrument.
Next Forex Lesson: Risk On VS Risk Off
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