Intuitively, traders know that a target market is influenced by developments in related markets and, in turn, the target market affects what happens in other markets. The difficulty is in quantifying those relationships. He then used that information to forecast moving averages, making them a leading rather than a lagging technical indicator.
As icing on the cake, forex is typically a trending market that makes it an excellent candidate for his forecasted moving average analysis. As with those articles in Commodities and Futures nearly twenty-five years ago, this book presents sound, practical information about forex trading, focusing on the benefit of analytic trading software that can make highly accurate short-term forecasts of the market direction of this exciting and potentially highly lucrative trading arena.
After spending nearly 20 years as editor of Futures Magazine Mr. Jobman is now Editor-in-Chief for www. As the world economy of the twenty-first century continues to grow and as new advances in information technologies continue to be introduced, financial markets will become even more globalized and sophisticated than they are today, increasing the central role that the forex markets play in the global economy. Since its introduction in the s, intermarket analysis has become a critical facet of the overall field of technical analysis because it empowers individual traders to make more effective trading decisions based upon the linkages between related financial markets.
By incorporating intermarket analysis into trading plans and strategies instead of limiting the scope of analysis to each individual market, traders can make these relationships and interconnections between markets work for instead of against them. Forex markets are especially good candidates for intermarket analysis because of the key role of the U.
What influences one currency often influences many other currencies, usually not in lockstep but to a greater or lesser degree, depending on the circumstance. Knowing what is occurring in various currencies and other related markets can provide traders with both a broader perspective and greater insight into forex market dynamics.
It can. This allows traders to make more effective and decisive trading decisions than would be possible by relying on traditional single-market technical analysis indicators that too often lag the market. This book is addressed primarily to traders and investors who use personal computers and the Internet to analyze forex markets and make their own trading decisions.
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It will interest both experienced traders and newcomers to forex markets who are inclined toward technical analysis and recognize the potential financial benefits of incorporating intermarket analysis into their trading strategies. I traded stocks and options for nearly a decade, using various technical analysis methods before I began day trading and position trading commodities in the late s while employed as a hospital administrator for Humana, one of the largest for-profit hospital management companies in the United States at that time.
A physician friend who traded gold futures provided the encouragement that moved me from equities into this new trading area. At first I subscribed to weekly chart services, which had to be updated by hand during the week and required a very sharp pencil to draw my support and resistance lines, which in turn determined where I placed my stops. It was very annoying to anticipate the trend direction correctly, only to miss out on a big move after being stopped out prematurely at a loss due to an ill-placed stop.
With only a handheld calculator available to compute numbers in the years before microcomputers, I learned the underlying theories and mathematical equations for numerous technical indicators, such as moving averages, and devised mathematical shortcuts to expedite my daily calculations. I was quite excited when I brought home my first personal computer in the late s. Soon I was teaching myself programming and writing simple software programs to automate many of these calculations. I quickly realized that the marriage of technical analysis with microcomputers would revolutionize financial market analysis and trading.
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Although I had been hooked on financial markets and technical analysis for nearly a decade by then, it was the prospect of applying computing technology to technical analysis that crystallized the intellectual passion that I had long sought. In at the age of 31 and intent on pursuing this goal, I started a trading software company that was the predecessor to my current company, Market Technologies, LLC. My goal was to design technical analysis software that would do more than just speed up the analysis calculations that I had been doing by hand each evening with a calculator.
I wanted to test and compare various trading strategies that I had created to identify the best ones and forecast the trend directions of the commodities markets that I traded. Working alone and at a feverish pace, I spent day and night for the next few years focused intently on my daily trading activities, researching more about the commodities markets, studying books and articles on technical analysis, examining every one of my winning and losing trades for patterns to incorporate into my trading strategies, and developing trading software for the microcomputers that were just becoming fashionable among commodities traders.
In , after three years of full-time research and development in which I was basically operating as a one-man think tank, I released ProfitTaker Futures Trading software, which offered both automated strategy back-testing capabilities and optimization. It was hot! This same year, I authored a series of articles. I was encouraged in those early years by several prominent technicians and traders. Foremost among them was Darrell Jobman at Commodities magazine. Had he not seen the potential of applying computer technology and trading software to the markets when this new technology was in its infancy and had he not supported these efforts by publishing articles on the subject in his magazine, there is no telling what route the application of computer software technology to technical analysis might have taken.
For the next few years, I continued my software development efforts with ProfitTaker, wrote many more articles, collaborated on books on trading, and spoke at trading conferences at which I warned about the dangers of curve-fitting and over-optimization. By the mids, through my observations of changes in how the markets interact, it had become apparent that the prevailing singlemarket approach to trading software was already becoming obsolete.
I concluded that technical analysis that looked internally at only one market at a time, such as ProfitTaker did, would no longer be sufficient, even with its strategy testing and optimization features. As a result, I embarked on my next maniacal mission, which would result in the development of intermarket analysis software. In that pursuit, the scope of technical analysis had to expand to include not just a single-market analysis approach, where I had focused my attention previously, but also an analysis of how related markets actually affect each other and, more importantly, how this information can be applied by traders to their advantage.
My goal was to examine the linkages between related global financial markets so that they could be quantified and used to forecast market trends and make more effective and timely trading decisions. In I developed my second trading software program, which focused on these market interdependencies. By then, I was sure that technical analysis would have to broaden its scope to include intermarket analysis,. Despite my early efforts at developing intermarket analysis software, I was not satisfied with the underlying mathematical approach that I had used to correlate intermarket data in the Trader program and felt compelled to continue my quest for a more robust mathematical tool.
I remembered this vaguely from academic material I reviewed while an undergraduate at Carnegie Mellon University in Pittsburgh in the late s. A professor there, Herbert A. Simon, was an early pioneer in the field of artificial intelligence and its application to decisionmaking under conditions of uncertainty.
In neural networks I found the right tool for my job! Neural networks had the ability to quantify the intermarket relationships and hidden patterns between related markets that were increasingly responsible for price movements in the global financial markets of the late s. In after considerable research in applying neural networks to intermarket data, I introduced my third and latest trading software program, VantagePoint Intermarket Analysis Software.
I chose that name because I felt that intermarket analysis gives traders a different vantage point on the markets than is possible looking at just one market at a time. VantagePoint uses neural networks to analyze price, volume, and open interest data on a specific target market and between that market and various other related markets.
The software then makes short-term forecasts of the trend direction and high and low prices of the target market. At this same time, other technicians, working independently, began to explore intermarket relationships, primarily from an intuitive and descriptive standpoint rather than the quantitative approach that I had taken.
Since the late s, I have continued to refine my trading software based upon neural networks applied to intermarket analysis and have succeeded at creating effective trend-forecasting trading strategies built around forecasted moving averages.
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VantagePoint, which at first only made forecasts for thirty-year Treasury bonds in when it was first released, now tracks nearly seventy different global markets, including stock indices, exchange-traded funds, interest rates, energies, agricultural markets, softs, and, of course, foreign exchange spot and futures markets.
The focus of this book is on how to use intermarket analysis to forecast moving averages, making them a leading, rather than a lagging, technical indicator for the dynamic forex markets. What Is Forex? If you have traveled internationally, you probably are well aware of the foreign exchange market, often called the forex or FX market. When you converted U. Although you may have noted the impact on your pocketbook, you may not have realized that you were also participating in the largest market in the world.
No one really knows what the actual figure is because there is no central marketplace for keeping tabs on all of the forex transactions around the world. In fact, forex trading exceeds the combined volume of all the major exchanges trading equities, futures, and other instruments around the globe. Although professional traders implementing sophisticated strategies account for most of the trading in the huge forex market, participation by individual traders has grown tremendously in recent years with the proliferation of the Internet, enhancements in personal comput1.
The introduction of the euro on January 1, , and the weakness of the U. Increased numbers of individual traders became aware of the role of forex in global markets with an eye toward profiting as currency trends unfolded. Local Values, International Impact Every country has its own currency to facilitate its business and trade.
The value of one currency as compared to another depends on the economic health of the nations involved as well as the perception of stability and confidence in the political climate in those countries. As conditions change, currency values fluctuate to reflect the new situation. These fluctuations create challenges for corporate financial officers and institutional fund managers but also provide opportunities for traders who want to speculate on impending changes in currency values.
Changes in currency valuations have a significant impact on governments, corporations, and financial institutions. Currency fluctuations, particularly when they are abrupt, affect the performance of bottom lines and the prices for many commodities and other markets. The forex market probably has a more pervasive influence on worldwide economic conditions than any other market, including crude oil. By their very nature, currencies entail strong intermarket relationships.
It is obvious that a currency cannot trade in isolation and that 2. Because government policies and economic developments that affect currency values tend to evolve over time, currencies are good trending markets. The key to successful forex trading is understanding how these currency markets relate to each other and how patterns of past price action can be expected to occur in the future as markets respond to ongoing financial, political, and economic forces.
However, these patterns and trends are elusive and may not be obvious from the examination of price charts. Nevertheless, traders need to spot these patterns and trends early, to get into what are potentially highly profitable trades and to avoid others. It was this realization more than twenty years ago that led to my focus on intermarket analysis and the development of intermarket-based market forecasting tools that could discern likely short-term trend changes based on the pattern recognition capabilities of neural networks when applied properly to intermarket data.
The forex market, by its very nature, is an ideal trading vehicle for the intermarket analysis and trend-forecasting approaches explained in this book. Why Trade Forex? Is not forex something that interests only bankers and big money managers? The advantages of trading forex are explained in detail in Chapter 2.
Intermarket Trading Strategies
Characteristics of Forex Trading Diversification. We live in a world where terrorist attacks can occur at any time and place; where geopolitical tensions over nuclear power, oil, human rights, and many other issues threaten to disrupt normal trade and economic relationships; where U. Economic uncertainty seems to be a way of life. Forex is the only instrument that incorporates all of these areas of potential concern and serves as a distinct asset class for speculators and investors. Global Market. Markets such as equities or interest rates tend to be traded locally during the business day in their own time zone.
All of these traders certainly should be aware of what is happening elsewhere as the global integration of financial markets continues.
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However, an event in Japan that directly affects Japanese stocks may not have the same effect in Europe, and traders of European stocks may not pay as close attention to what happens in the Japanese or U. Forex, on the other hand, is an asset class that is truly a global investment reflecting every economic development on earth.
Whatever has an influence on currencies in Japan has an effect on what happens to currencies in London or Chicago. Twenty-four-hour Trading. Forex trading begins Monday morning in Sydney, Australia Sunday afternoon in the United States and moves around the globe as business days begin in financial centers from Tokyo to London to New York, ending with the close of trading Friday afternoon in New York.
Anything that happens anywhere in the world at any time of day or night affects the forex market immediately. It is not necessary for an exchange to open before the effects can be seen. The forex market is always open for trading. Electronic Trading.