Forex and Stock Market Correlation
Forex and stock markets are two of the most popular investing methods. But before we jump into the deep end of how they relate to each other, let’s first understand what the forex market and stock trading are.
What is Forex?
Forex, a short form for foreign exchange involves swapping one currency with another. Therefore, in complete forex trade, two currencies are involved.
For instance, the USD/CAD. In this case, the USD (US dollar) is referred to as the base currency, while the CAD (Canadian dollar) is the quoted currency. Together, they are called a currency pair. In the quoted format, the trader is buying the USD using CAD.
Forex trading takes place on many levels. The primary players are usually banks and institutional investors involved in cross-border transactions. There are also independent forex bureaus that tourists and residents can use to convert currencies.
However, the most popular form of forex takes place on forex brokerage platforms, whereby retail traders buy and sell forex pairs multiple times a day for profits. This is essentially what is called forex trading. So, in a nutshell, with forex, you are using one currency to buy another.
What is the Stock Market?
Stock market investing is conducted via a public forum called the stock exchange where brokers and dealing agents place bids to buy shares of publicly listed companies.
A stock is the investment term given to a publicly listed company. Buying shares of stock entitles investors to commensurate ownership in the underlying company. Stock trading essentially involves swapping currency for shares of a company.
Companies gain public listing through an initial public offering (IPO), which provides investors with an opportunity to buy shares of the company before listing.
Stocks can also be traded on brokerage platforms in the form of Contracts For Differences (CFDs), where retail traders can buy and sell without realistically owning a portion of the underlying asset. This has become one of the most popular methods of stock trading.
Forex and Stock Market – What Is The Correlation Between The Two?
The most significant correlation comes into play when trying to find out which market moves the other. On one hand, you have the stock market, which tends to perform well when the economy of a country is booming. The same can be said of the forex market.
However, the correlation is more deeply intertwined than just a case of responding to positive economic numbers.
Positive Correlation Between Forex And Stock Market
Firstly, when the economy of a country is doing well, that country becomes an attractive destination for investments. And as investors move their wealth to a country with promising economic growth prospects, the demand for the local currency rises.
That is because investors are required to convert their foreign wealth to local currency to invest. And the higher the demand for the local currency, the stronger it becomes in the forex markets against other currencies. In such a scenario, this is called a positive correlation between forex vs stock market prices.
In the chart below, we used the S&P 500 index and the US dollar index to demonstrate how a positive correlation works. It also shows how a boom in the US stock market preceded a bullish rally in the US dollar.
This illustrates how an influx of investors in the US economy amid a booming stock market resulted in the strengthening of the US dollar against foreign currencies.
Negative Correlation Between The Stock Market And Forex Trading
A negative correlation occurs when the foreign market moves in the opposite direction to stock prices. For instance, in the chart below the S&P 500 index started a rally on December 1, 2016. Shortly after, the US dollar index was trending downwards, indicating a negative relation to the bullish sentiment in the stock market.
Timing The Market
So, looking at the behavior of the forex vs stock market prices, it can be unpredictable when trying to trade one instrument relative to the other. In the first instance, there is a positive correlation, whereas, in the second, the relationship is negative.
So, how do you know when to take a position in a forex trade or a stock? The first thing is to stay informed.
This is why there are trading groups in place. Trading groups work as networking platforms where investors can get information instantly, communicate accordingly, get insight into the analyst’s opinions, and receive timely updates.
But this in itself is not enough for most traders. Still, you’ll need to decide the type of action you want to take depending on the information you receive on these platforms. That’s why forex trading signals have become among the most dependable options for day traders.
Forex signals are trading instructions derived from the actual trading activity of expert traders. They can help beginners get more efficiency out of their transactions.
There are a variety of ways that traders can receive forex trading signals. Some platforms enable traders to follow experienced traders via a trade copier service, which allows them to copy the trades of expert traders as they trade.
What Is A Trade Copier Service?
A trade copier service is a trading solution offered by a group of professional traders to beginner traders or traders that do not have time to follow market events closely. Telegram Forex is a user-friendly forex trading solution that provides traders with trading signals for an around-the-clock trading experience.
The service can also act as your expert advisor and improve your chances of gaining success in the forex market.
Often, traders question the technical and fundamental reasoning behind trading signals offered in the market. With Telegram Forex, you will be provided with the reason behind the position set out by experts.
Furthermore, the signals are structured in an easily understandable format, making them easy for you to understand. This also makes it easier for the trader to act on them, ensuring that you never miss a profitable opportunity.
One of the main reasons why traders choose Telegram Forex is because you can filter the signals you wish to receive according to your risk appetite, market preference, and even time frame (long-term/short-term).
To sum up the correlation between forex and stock markets, we have established that generally, stock market movements tend to precede price movements in the forex markets primarily because of the macro-economic factors.
We have also discovered that this relationship is not always positive, hence the reason why your chances of success may not be guaranteed by simply trading forex based on the movement of the stock market.
This is why using a trade copier service like Telegram Forex has become a preferred option for beginner traders and even experienced traders that do not have the time to keep tabs on market events.