4 x Basic Principles Intermarket Analysis is Based Upon

The Basic principles Intermarket analysis are based upon are the following :

- All markets are connected in one way or another, by both domestic issues and global economic trends.

- A market never moves in isolation, its impacted by other markets and if you think about it, this is obvious and logical

- An analysis of one market must include an analysis of all the markets as they are all inter related and all markets impact on each other.

- The four main market groups of financial instruments, you need to follow to do the analysis correctly are - stocks, bonds, commodities, and currencies.

Intermarket Analysis – Related to Traditional Technical and Fundamental Analysis

Technical analysis by it's very nature is based upon looking at a single market in complete isolation from any other - but intermarket analysis sees things from a broader perspective. When analysing the currency market, the Intermarket trader will also look at the stock market (to consider how money around the global economy and the bullishness of sentiment), the bond market (to see how people see interest rates moving in future), the commodities market (to get an idea of inflationary trends and supply and demand in different economies worldwide), and overseas markets (to get an idea of general global market trends).

Fundamental analysis is similar to the Intermarket analysis in many ways - because both methods of analysis, look at economic factors, news and market data, to gain an overall view of where the market may be heading in the future, the difference between the two disciplines however is:

Fundamental analysis restricts its analysis to a single market, while Intermarket analysis examines multiple markets at the same time, to try and decide where the currency pair (or market studied) maybe going next.

John Murphy and Intermarket Analysis

The idea of Intermarket analysis is credited to John Murphy a famous technical analyst, who made this method popular among both fundamental and technical traders, in his book - “Intermarket Analysis: Profiting from Global Market Relationships” which is essential reading for any serious currency trader.

He began trading as a strictly technical trader, but later expanded his research, so he could see things from a wider perspective. He started to see things more from a more global point of view and thus, developed the Intermarket approach to help forecast future price movements.

Today, many different types of traders incorporate Intermarket analysis in their trading strategy, from banks to major corporations, to savvy individual traders.

Final Words

We live in a global economy and all financial markets, impact on each other and that's a fact! This is reason , why intermarket analysis is so valuable when trading currencies; a currency pair doesn't move in isolation from other financial markets! Stocks, bonds, currencies and commodities, all attract amounts of money depending on how the global economy is performing and investor sentiment and all impact on each other – so see the big picture and if you do, you will get an edge in your quest for currency trading profits.

To be able to generate trading signals with confidence in their currency trading strategy, traders need to look outside the currency pair their trading and see how other markets both domestically impact on the currency pair – it sounds logical and it is! If the currency pair is considered the target market, you can get better market timing and more accurate trading signals, by studying the external market forces that affect the currency pair you are trading.

If you apply intermarket analysis as one of your currency trading techniques, you will see the whole picture and by doing this, you will increase your currency trading profits and reduce risk at the same time.