Chapter 3 – How does the Forex Market move?

Another important correlation relationship is EUR/USD, GBP/USD, and EUR/GBP. It is vital to watch the movements between these 3 currency pairs if you plan to trade any one of them. It is important to identify what is moving the market at the time, is it USD, EUR, or GBP? By keeping an eye on the EUR/GBP pair, you can validate or eliminate either currencies, and concentrate on the one that is making the most movement.

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It would take a complete new book to fully cover the subject of correlation. But for the purpose of fundamental trading, just understand this fact that one currency cannot move far without affecting the other. Look at this simple calculation and see if you can notice the big picture.

(211.73 / 1.9945) = 106.15

Now do these numbers seem familiar?

GBP/JPY = 211.73 (BID)
Divided by GBP/USD at its current price of 1.9945 (BID)
You get the current price of USD/JPY at 106.15 (BID)

In essence, you can take any price you have on the GBP/JPY and divided in with USD/JPY, and you’ll get GBP/USD price at the time or multiply USD/JPY with GBP/USD and get GBP/JPY current quote.

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Market is not perfect. Sometimes we will see slight discrepancies in pricing quotes, but one will not move far from the other. Therefore, when we see related pairs making strong moves one way or the other, it just gives us more confirmation of the direction.

Another interesting point, since GBP/JPY is about twice the value of USD/JPY, a single pip change of value in USD/JPY usually becomes 2 pips of change in GBP/JPY. If both USD/JPY and GBP/JPY are hitting support/resistance areas, then these support/resistance areas might just be stronger.

Important Concepts

  • Every currency pairs moves differently.
  • Learn about daily ranges, support & resistance areas, and
    correlation to other currency pairs is key to understanding HOW
    they move.
  • Use correlation as confirmation to your existing trades or
    the planning of your future entries.
  • Limit your trading only to a few currency pairs, generally
    don’t trade more than 4 currency pairs.
  • It is better to be focused on a few and know that you can
    catch most of the movements than to be focused on all and worry
    about missing out.

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About Kelvin Ching

I'm a professional Forex trader and I have been trading for over 7 years. I was a series 3 broker and a registered CTA with the NFA, the main regulatory agency in the United States, and I have been involved at the highest levels in commodity trading. I also have a background in Information Technology, graphics design, and programming... I'm the co-founder of CurrencyNewsTrading.com, a site dedicated to fundamental analysis and news trading.

Comments

  1. uwah prince ozioma says:

    thanks a thousand times really appreciate the work your doing ,changing peoples mentality on forex trading. ore grease to your elbow.please can you send this topic in andownloadable format to my system Definitive Guide to Fundamental Trading. thanks

  2. Hello Kelvin,
    Thanks for the wonderful work that u and Henry have been doing in making Forex trading becoming easier for us everyday.
    Please kindly help me to get this your “Definitive Guide to Fundamental Analysis” in a downloadable format for easy way of reading it . Send it to my e-mail.
    Once again , thank you very much, May the Good Lord continue to bless the work of your hand in Jesus name-Amen

    • Hi Wale, I’m sorry but the “Definitive Guide to Fundamental Analysis” is only available in download format for our subscription members in FNTA (ForexNewsTradingAcademy.com); at this time, this online guide is available FREE here at currencynewstrading.com

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