Currency Correlation and the FOREX Market
Executive Summary about Euro Rate by Jack Hyman

A good trader selects a few currency pairs – and really gets good at those pairs. You also look for pairs that have correlations or relationships. For example, we look at the EUR-USD and GBP-USD. The correlation here is the USD of course. If the pairs go down in value, this means that it favors the USD (Dollar). This is called Risk Adversion because the trader looks to gather to the dollar as their safety net whereas if the currency pair rises, it’s called Risk Appetite which is when the trader believes that the dollar is not in their greatest interest to invest in.

Another trend is to look at where the currency pair is placed. For example, there is a greater than 90% correlation that if you have the EUR-USD moving downward, the USD-JPY or USD-CHF (JPY is Yen and CHF is Swissy) will be moving up. You can double your profits by pairing currencies of opposite poles.

Select no more than five currency pairs. You will see that the EUR-USD often trades in tandem with EUR-JPY and the USD-JPY also trades in sync with the EUR-JPY. There is almost a complete negative relationship between the EUR-USD and USD-CHF.

So look for your currency pairs and begin to research what makes them tick in the currency market.

The Various Sections of the Forex Market
Executive Summary about Euro Rate by Lyndsay Wilkinson

#1 Spot Market
This is the market that most day traders use. The spot market also known as the cash market is the actual cost quoted at that moment in time. Previously a trader had to get in touch with his broker or bank and ask for a price and nominate the currency he wanted to trade.

#2 Forward trading
The main issue here is the interest rates. Each country has its own interest rate and often these are different, if you are trading EUR:GBP the European interest rate might be 5% and the English rate 3% ( these figures are for illustrative purposes only, especially over this period as interest rate changes are happening frequently) the difference in this example is 2%.

Example:
Cash price (spot price) X Interest differential(English interest rate – Euro interest rate) x days/360 Divided by 1+ Euro rate x days/360.

If the currency is earning high interest that is taken into the price.

#3 Currency Futures
These are another forward contract. Those with a lower capital can trade currency futures.

#4 Currency Options
If you procure an option you have the right to sell or buy at an agreed price on a specific date. The advantage is you have the right, but you are not obliged to. If the price moves against you, the good part is you can still use the cash price.

Other posts you may be interested in reading: USD To, Euro Exchange Rate

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