Intermarket Trading Strategies

17

Forex Trading Using Intermarket Analysis

Human decisions affecting the future, whether personal, or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist.

-John Maynard Keynes

17.1 THE FOREX MARKET

The foreign exchange market, commonly referred to as the “forex” or “FX” market, is the largest and most liquid market in the world as the 3.3 trillion USD daily turnover dwarfs the combined turnover of all the world’s stock and bond markets. Banks, import/export companies and multinationals, as well as hedge funds and other large institutions trade trillions of dollars on the forex market every day. Because of their superior liquidity, forex markets are less prone to manipulation by even the largest players, although the central banks intervene from time to time to affect the price movements of their respective currencies. Such interventions, however, can only influence currency values for short periods as market trends tend to move currencies against the central bank. One example is the Bank of Japan intervening in order to push down the value of the yen in order to promote exports.

Some countries, such as China, manage the exchange rates of their currency. In this chapter I will focus on countries with floating exchange rates.

Forex is an exchange where one country’s currency is exchanged for another’s through a “floating” exchange rate system. A trade is executed with the simultaneous buying of ...