FX Trader’s Tip: Keep an Eye on the Stock Market

Even though you’re trading currencies, it helps to keep an eye on the stock markets. In fact, just by watching the stock markets, you can gain an additional edge in the currency markets.

First, if you’re a short-term trader (you trade several times a week or even a day), look to see how the overnight markets performed in both Europe and Asia. Also, check the financial news (Wall Street Journal, Bloomberg etc) to see how stock futures are doing. For example, are they predicting stock futures will be higher or lower opening for stocks?

Let's say the overnight markets performed well. The financial press predicts that U.S. stock futures will be a higher opening and stock earnings are supposed to "beating expectations." In that situation, you can earn some nice short-term gains by buying the euro against the Japanese yen (EUR/JPY) because this currency pair is so highly correlated to the Dow and the Nikkei.

The opposite is also true. Say stocks overseas performed poorly last night. You see that many stocks are missing earnings that morning before the open. If stock futures are positioning for a lower open on Wall Street, then look to sell short the euro vs. the Japanese yen EUR/JPY right before the stock exchanges open.

This is just one of many tips that can give you what we call the “trader’s edge.” We’ll be back here periodically to give you some tricks for successfully navigating this US$3.2 TRILLION foreign-exchange market that most mainstream investors never touch.