The last of my “Seven Keys”: Harmony

The last of the seven keys is harmony, and for many traders it’s the most difficult to wrap their brains around the monitor. I believe this is because it has as much to do with my Forex Market Pulse as it does the relationship pairs have to one another and the U.S. Dollar.

In my opinion, no trading is done in a bubble – there are far too many factors that affect the pricing of any market. While there’s no way to track every factor, there are some major players who have steady roles in the way the forex market behaves…especially when it comes to currency pairs that include the U.S. Dollar.

I should mention that my “prime time” trading hours are between 8:00am and Noon EST. So consider that I am looking for trades and usually entering them during the overlap between Europe, the U.K. and the U.S. trading hours. The reason for my choosing these trading hours is because of the influence of the stock market open, economic events and releases that occur primarily during these hours, the fact that the Frankfurt, Paris, and London markets are open while all create the largest amount of typical price movement in dollar-correlated pairs and comm-dolls.

Trading “harmony” not only implies that I will seldom be long both on the EUR/USD and USD/CHF simultaneously on similar time frames; but it also implies that I will not fight the trend of influential commodity futures contracts either. I call the commodity futures that affect the forex market my “forex market pulse”. These contracts include the U.S. Dollar Index, Dow Jones, crude oil, continuous commodity index, and gold. The bond markets can be included but I do not use this as heavily, rather I am simply aware of any significant changes in the trend. I believe the most basic and easy-to-understand relationship is between any pair that trades against the dollar and the U.S. Dollar Index. For me, one of the most straight-forward relationships is the EUR/USD to U.S. Dollar Index. These two markets move inversely to one another nearly tick for pip. Generally speaking, if the dollar is weak, the EUR/USD is strong as the euro gains on the dollar. I will seldom consider longer-term bullish moves on the EUR/USD if the dollar too is strong. Another relationship then would be directional relationship the dollar has to the USD/CHF. A weak dollar and strong franc will result in a downtrend on the USD/CHF. The directional relationship between the U.S. Dollar Index and USD/CHF is generally sympathetic. Take this one step further and I will very rarely be in a situation where I will be long the USD/CHF and EUR/USD simultaneously on similar time frames. Again there’s no “harmony” because eventually one trade will be on the wrong side of the dollar. I look form harmony when I trading multiple pairs because when the market is “clicking” which is to me when the correlations and trends are clear – trades just line up with their relationship back to the U.S. Dollar Index. This is precisely why I spend so much time studying the risk appetite and risk aversion that affects the U.S. Dollar and U.S. equities.

Here’s one last concept that related to harmony and that’s the USD/JPY’s ability to identify the driver of market psychology. In other words, is it the dollar or the Dow that’s driving the market on any given day or overlap. The USD/JPY is an important pair because the yen itself is often borrowed (sold) to fund the purchase of higher-yielding assets aka the “carry trade”.

If the USD/JPY is moving directionally with the U.S. Dollar Index, then the dollar is the driver of psychology. When the Dow is the moving with the direction of the USD/JPY then the equities market is the driver. I like knowing this because different news can affect the dollar or equities and knowing whether risk appetite or aversion is fueling price movement helps me determine how I will tackle the trading day.

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