A lot of traders assume that when you trade on the forex market you only have to worry about the forex market. While this is true there are three other markets that you can look at when you are trading. When you look at these markets you will see the correlation between them and forex. Looking for movements on these markets can help you predict and determine what could happen on the forex market.
Forex and Bond Yields
The bond market and the forex market are actually very closely related. This is due to the driving factor that these markets have in common. Both markets are driven by the economic and monetary policies of countries. When the economy of a country is strong investors will place their money in the country.
This causes an increase in the demand for a currency. The main way that investors place their money in a country is through the bonds market. This means that when there is an increase on the bonds market there is likely to be an increase on the forex market. The country that the bonds are related to is the one that will be affected on the forex market. You should look for short-term bond yield patterns on the bond market. These can be used as a confirmation of trend formation on the forex market.
The Currency Futures Market
Another market that you should look at when you trade forex is the currency futures market. This derivatives market is ideal for confirming short-term trends in the forex spot market. The main way that this is accomplished is by looking at market volume. This means that trades should look at what is being traded on the futures market to determine open interest and market sentiment.
The information that you should look at is the non-commercial trading figures. The commercial trading figures can be considered, but they are not really what you need. One of the ways that you can find this information is on the COT report. When you look at this information you are looking to confirm a trend. You should not use this information as the sole analysis of what you should trade and when.
The Credit Default Swap Market
The credit default swap market is actually a very little known market. However, when you look at this market you can see some long-term sentiment for different currency pairs. This is ideal because most of the other market should be used for short-term trends only.
When people trade on this market they purchase contracts that protect their positions against potential credit events. This is often seen as a form of offsetting risks. When the trades are done you can see which way trader are looking in the long run. A trader will only protect their long-term investments and not their short-term ones.
Which Market to Use
Some traders are confused as to which market they should be looking at. The market you should look at depends on how you are trading and what you want to do. If you are trading long-term then you may want to consider the credit default swaps market. However, short-term traders can look at the other markets instead.