Using Equities to Trade FX

Did you know that equity markets can also be used to help gauge currency movement? In a way, you can use the equity indices as some kind of a forex crystal ball.

Based on what you see on the television, what you hear on the radio, and what you read in the newspaper, it seems that the stock (equity) market is the most closely covered financial market. It's definitely exciting to trade since you can buy the companies that make the products you can't live without.



One thing to remember is that in order to purchase stocks from a particular country, you must first have the local currency.

To invest in stocks in the Japan, a European investor must first exchange his euros (EUR) into Japanese yen (JPY). This increased demand for JPY causes the value of the JPY to appreciate. On the other hand, selling euros increases its supply, which drives the euro's value lower.

When the outlook for a certain stock market is looking good, international money flows in. On the other hand, when the stock market is struggling, international investors take their money out and look for a better place to park their funds.

Even though you may not trade stocks, as a forex trader, you should still pay attention to the stock markets in major countries.

If the stock market in one country starts performing better than the stock market in another country, you should be aware that money will probably be moving from the country with the weaker stock market to the country with the stronger stock market.

This could lead to a rise in value of the currency for the country with the stronger stock market, while the value of the currency could depreciate for the country with the weaker stock market. The general idea is: strong stock market, strong currency; weak stock market, weak currency.

If you bought the currency from the country with the stronger stock market and sold the currency from the country with the weaker stock market, you can potentially make some nice dough.

Elliott Wave Theory

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Back in the old school days of the 1920-30s, there was this mad genius and professional accountant named Ralph Nelson Elliott.

By analyzing closely 75 years worth of stock data, Elliott discovered that stock markets, thought to behave in a somewhat chaotic manner, actually didn't.

When he hit 66 years old, he finally gathered enough evidence (and confidence) to share his discovery with the world.

He published his theory in the book entitled The Wave Principle.

According to him, the market traded in repetitive cycles, which he pointed out were the emotions of investors caused by outside influences (ahem, CNBC, Bloomberg, ESPN) or the predominant psychology of the masses at the time.

Elliott explained that the upward and downward swings in price caused by the collective psychology always showed up in the same repetitive patterns.

He called these upward and downward swings "waves".

He believes that, if you can correctly identify the repeating patterns in prices, you can predict where price will go (or not go) next.

This is what makes Elliott waves so appealing to traders. It gives them a way to identify precise points where price is most likely to reverse. In other words, Elliott came up with a system that enables traders to catch tops and bottoms.

So, amidst all the chaos in prices, Elliott found order. Awesome, huh?

Of course, like all mad geniuses, he needed to claim this observation and so he came up with a super original name: The Elliott Wave Theory.

But before we delve into the Elliott waves, you need to first understand what fractals are.