The first part of my daily routine involves a thorough check on market fundamentals and sentiment in order to forecast price movement for the following session. To any equity trader this is an essential part of trading, but in the FX market where technicians survive in big numbers, it's a commonly bypassed part of the day. For me, its not optional, its required, for a number of different reasons. The main ones being:

· Catch the trend and let my trades ride confidently
· Increase my win rate
· Increase confidence in longer term perspective for trades that follow in the days to come

All three of which can be summed up into: increasing profits.

There are countless factors that go into the price of a currency, and just as many forces acting on them throughout the day. In addition to a technical analysis of the currencies I’m trading, I do a technical / fundamental run of the following when I’m preparing for the day:

· Equity markets worldwide (close attention to US, Europe, UK, Asia and Australia)
· US Bond Market
· Gold
· Crude Oil
· The Dollar Index

The biggest thing I concern myself with is what most traders are focused on for the day and how will it affect the current price. I’ll describe the relationships and correlations shared in just a bit.

Like energy, money is not created or destroyed, it just moves from one place and into another. The money tied up in carry trades could end up in bonds. Euro hedges on equities could be sold off and USD bought in return. An investor sells USD and buys gold, viewing it as a safer investment, etc etc. The possibilities can be endless, but all we care about are the big ones and ultimately how it will affect the price of what we want to trade.

As I write this article USD is in a huge uptrend. The main cause of this is equity indices declining worldwide, and currencies are being sold as equities are being sold. When this happens, people need to buy dollars, as USD is pegged directly to most of these major currencies. So as investors sell Euro, for example, they need to buy USD.

Just like anything else, the market trades in fads. One day an issue is hot, the next day its not. Traders across the globe are reading the news and reacting to it, and it's our job to be on the side of the majority controlling price. Its not as difficult as it seems, and is sometimes just a matter of diligence reading the news and understanding how others will react to it under current conditions.

We take trades here based on technicals, but need to understand the fundamantal backdrop. I don’t mean to turn you into an economist here; you’re not. Your specialty is trading. But you have to understand what’s moving price in order to be on the same page as everyone else. At the end of the day you’ll have greater confidence in your trades and a much better understanding of how everything operates in the world’s largest market.

Back to the details. There are certain relationships that all of the above listed items share, and the obvious reason I care about other markets so much is because they are affecting the price of the currencies. In a nutshell, the table below describes the basic relationships between these markets and the correlations they share:




There are many other things that can be said about the markets and pairs on the table above; its by no means the full story, but they’re the basic relationships to be aware of.

For the S&P, Crude Oil and Gold, I’ll also do the same technical analysis I do on the currency markets daily. Ultimately I’m just looking to forecast, and realize that these relationships exist. Technicals work in these markets in the same way they do in the currency market. If the S&P hits major resistance, for example, USD/JPY has a good chance of turning as well.

They key is to zone in on what the market cares about at any given point in time and react to it. Again, they’re all fads, and some last longer than others. Hysteria and human intervention is what ultimately drives any market, so above all, its important to hone in on what the majority of traders/investors care about and trade along with it.

If I can make any recommendation, its to simply read the news, and do it constantly. While you're waiting for the next setup to arrive, dig through credible news sources like Bloomberg, Reuters, The Economist or The Financial Times and take a hard look at what the biggest issues are in order to understand what’s moving the value of what it is you’re trading. After a while you’ll become more and more comfortable at recognizing the factors that are shifting things around, and how they coincide with your technical levels. I have a live news feed from Bloomberg and IFR Markets next to me all day long. Unexpected events can run the currency market like nuts, so its important I know what’s going at all times. This feed has both made me and saved me a lot of money over time, and I wouldn't sacrifice it for a MACD any day of the week.