Like any market, the Forex market is correlated, to a greater or lesser extent, with the rest of the markets, be they indices, commodities, therefore in general terms with the commodities market.
The most important of all commodities (although we are beginning to have a great variety of commodities that we will have to follow very closely) since the beginning of history has been gold having a strong impact on the currency market, this is mainly due to the fact that in times with confidence problems people decide to invest in safer securities and thus diversify the risk. This is what has happened with the dollar, for example, in times when the dollar fell, the price of gold rose most of the time.
If we take gold as an example of commodities…
We look at the price of gold since October 22, 2010 the price drew a Shoulder-Head-Shoulder, a figure that indicates a change in trend as long as there was a break in the clavicular line, as happened on January 20 of this year having the confirmation to break the previous swing, so it was a good point to sell or enter short. The objective of the price was the distance from the head to the clavicle line and in this case it coincided with a fairly important support but never reached it as it was unable to break the 1.3000.00/oz.
Since January 25th we have found the same case, the price has formed another figure Shoulder-Head-Shoulder but reversed indicating a possible change in trend and thus resume the bullish path. If you look at gold, it is in a fairly well-defined bullish trend with rising highs and lows breaking the two downtrend lines. The target indicates that the price should reach 1381.95, so we should see a break in the maximum formed at 1.367 to confirm that the bullish trend can continue. This may be partly due to the rise in oil prices due to the crisis in Egypt, which is affecting the forex and commodity markets.
We will see how currencies and commodities behave in the coming days/weeks and especially how the Euro is evolving against the Dollar. These last few days have been full of fundamentals as we had Trichet’s testimony which maintains that he will continue with his current monetary policy, on the other hand Trichet has decided to maintain interest rates even though the CPI will be at 2.4% in the Euro zone so the conclusion we draw is that both Europe and America want or at least try to weaken their currency and thus stimulate their economy.
We will also see how the price of oil is evolving because of the political crisis that Egypt is suffering, which has caused an increase in the price of Brent’s barrel, currently quoting above 102 dollars, reaching 103.32 on February 3, the highest price since December 25, 2008.
This shows the long-term effects of the trend due to fundamental announcements, and traders entering and exiting the forex market irregularly. It should be noted that the higher the number in the moving average, the longer it takes to move effectively. In the 200-day moving average as an example, it takes a massive turn and direction to change the slope of that trend. This can help you stay in a trend for a very long time.
Better yet, an excellent way to determine the trend is by a combination of the two tools mentioned above. Many forex traders only seek to trade in the direction of the market based on a specific average movement. For example, you can choose the 100-day moving average in forex. If the price is above the 100-day moving average, you’re just thinking about buying. If it’s underneath, you’re just trying to sell. If you align the trend lines on the moving average, and both tell you that buying a currency pair, it becomes very clear that the trend is moving in a bullish direction. While this does not guarantee 100% success, it certainly keeps you pointing in the right direction and allows you to be driven forward by the momentum of the forex market.
By staying in the same direction as the trend, we allow other operators in the market to push trade forward, and help you reap more profits. This is perhaps one of the most basic and fundamental ways to earn money in the currency markets. Unfortunately, investors are not paying much attention to the trend now. Don’t let this common mistake influence your decision to trade forex.