You might have even spoken to some of them inside our Trading Room.
In this lesson, we will explore the reasons why many traders consider there to be a connection between the Stock and Forex markets.
For traders not familiar with the Stock Market, it can be defined as a place where investors buy and sell shares (stocks) in public organisations.
In more simple words, the stock market is as a place where companies like Microsoft sell small pieces of themselves with the intention to raise money for a variety of things such as inventing new products, building new factories, expanding to new countries or hiring more people.
And anyone including you, me, your gran, your wife, your girlfriend can buy those pieces.
When you purchase stocks in a company, you become a part-owner. And when a company in the stock market makes money, everyone who owns a piece of that company profits too.
You might have heard of people buying stocks at Zoom at the beginning of the pandemic and their accounts blowing through the roof couple months later.
For those who haven’t heard, here’s a graph of what happened with Zoom throughout the global COVID-19 pandemic.
With that said, Stock market, just like Forex is all about strategy, thorough analysis and the right timing.
You profit from owning stocks when the share price increases, and if the company’s profits fall then so does the price of your shares.
So now that you understand what the stock market is and how it works, let’s explore what the most popular Stocks are and why.
Only then, you will be able to understand how and where the Stock and Forex market correlate.
There are millions companies in hundreds of countries around the world selling stocks, and they are all listed under certain Stock Indexes.
A stock index is a measurement of a section of the stock market. Generally, it will show the weighted price average of your chosen stock and can be classified in a number of ways.
With that out the way, let’s discuss the most popular Stock indexes worldwide.
Nikkei 225 is the most popular index in Japan consisting of 225 companies.
These include organisations such as Honda, Mitsubishi, Toyota and Sony.
You can find the full list here.
It is currently the most widely quoted average of the Japan Stock Market.
Nikkei and USD/JPY have been showing a strong correlation for many years now.
For example, before the economic recession in 2007, when economies around the world experienced countless months of negative GDP growth, the Nikkei 225 and the USD/JPY were inversely correlated.
Traders and investors believed that the Nikkei Stock market was a good reflection of the economic state of a country.
So if Nikkei 225 were to rally then it would lead to the strengthening of Yen and therefore the USD/JPY dropping.
And it also worked in the opposite direction. Whenever the Nikkei would drop, the value of Yen would weaken and USD/JPY would rise.
However, after the financial crisis, the correlation between Nikkei and USD/JPY went crazy like Britney Spears.
They no longer moved oppositely, but instead, they have moved in the same direction since. Just take a look at the image below.
And that’s just one example of how Stocks and the Forex market correlate.
The Dow Jones Industrial Average or Dow for short is like the caviar of the Stock Market.
It is one of the most notable and premier indexes traded in US and is widely used to determine the industrial performance of the US economy.
It has 30 components and tracks the price movements of 30 largest and most influential U.S. companies in the stock market. These include Disney, Coca Cola, Boeing, McDonald’s, Microsoft and many more. You can see the full list here.
The strength or weakness of USD has an impact on the United State’s Stock market, especially Stocks of BIG worldwide companies.
For large U.S. companies that market products around the Globe, a rising U.S. dollar can put a dent into the profits.
Therefore, if the Dollar is strong, it makes it difficult for them to increase their prices or even maintain sales at current level.
As a trader it’s always beneficial to look for correlations between other financial markets.
These correlations can effectively indicate price direction, which is useful when it comes to making trading decisions.
However, it is crucial you remember that correlations are not a sure thing and shouldn’t be taken for granted.
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