Intermarket Trading Strategies

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Intermarket Analysis

It’s not that I am so smart; it’s just that I stay with the problems longer.

-Albert Einstein

 

 

The basic premise of intermarket analysis is that there is both a cause and effect to the movement of money from one area to another. Consider, for example, the price of gold and the dollar. Because gold is denominated in US dollars, any significant fluctuation of the dollar will have an impact on the price of gold, which in turn will affect the price of gold mining stocks.

The strength and direction of the relationship between two markets is measured by the correlation coefficient which reflects the simultaneous change in value of a pair of numeric series over time.

Highly positively correlated markets can be expected to move in similar ways and highly negatively correlated markets are likely to move in opposite directions. Knowing which markets are positively or negatively correlated with a given market is very important for gaining an understanding of the future directional movement of the market you propose to trade.

Advancements in telecommunications have contributed to the integration of international markets. Sophisticated traders are starting to incorporate intermarket analysis in their trading decisions through a variety of means ranging from simple chart analysis to correlation analysis. Yet the intermarket relationships hidden in this data are often quite complex and not readily apparent, while the scope of analysis is virtually unlimited.

But what ...