Trading in the market does not happen in a vacuum. This mantra applies to all investment markets; the usual suspects like stocks and commodities, but also Forex. There are a variety of events in any given environment that could affect the values of items in any of these markets. However, what we want to understand is how the events and movements in other markets can affect movements in the Forex market. Insight into this phenomenon will help people to learn how to trade forex better.

Big Investment people always talk about diversifying your portfolio. The idea is not to put all your eggs in one basket so you can keep going in case on thing doesn’t work out so well. There is also the idea of hedging. Basically, it involves trading in the opposite direction e.g. buying another asset when you have a sell position opened, to smooth out the risk. on the face of it, it would seem counter-intuitive. It might seem that any gains made would also be cancelled because the loss on the opposite trade would be higher as well. However, smart traders try to short off the losing trade once it becomes more apparent the direction that the trade is heading.

All of the above can be applied to the Currency Trading Market. I personally do not have an Account that allows me to invest in stocks or oil, but I can apply the trades I might have made in either of these markets to my Forex Trading. For example, take the relationship between commodities like Gold and Oil, and currencies from Australia and Canada. Rising Oil prices help to increase the Canadian Dollar’s value against the dollar. This occurs because Canada is one of the World’s largest producers of Oil. Canada is also the biggest supplier of it’s neighbor, the US.. When Oil is on the rise, it is good for Canada, as much of Canada’s Economy depends on it. The end result is, you can trade the US Dollar/Canadian Dollar currency pair armed with this information.

This can be applied to a lot of other forex pairs. You can also combine the application to profitable effect. Rising Gold tends to be good for the Australian Dollar and bad for the US Dollar, so one can buy the Australian Currency against the Dollar under such circumstances. Interest rates in Japan have been very low historically, so when investor want to put their money to work, US Equities are favored as there is a higher rate of return. Thus the USDJPY currency pair tends to rise in value, as the Yen is sold in favor of the dollar.

The thing to note here is that this correlation is not absolute. There are times when it just won’t hold, when more important factors are at work, such as in a time of Economic strife when predictability in the markets reduces and everyone is afraid. These correlations will often reverse at a moments notice without much warning. . This was the case in January 2009, when Gold and the Dollar began to move up at the same time. Not everyone is fond of these interrelationships. Some people claim they are of little value, and do not apply. However, they are can be of value. As a Forex Trader, you have to make use of all tools that come your way. You put your stock in different items when you are trading, be it fundamental or technical in nature. In each case, you have to make a judgment as to what action to take based on the information you have. The key thing is to ensure that your risk management strategy is clearly defined, so if something goes against you, you can ride it out.

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