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Got a feel for stocks? Then you have a feel for currencies…and didn’t know it!
By Sean Hyman | May 21, 2009
I’ve met many traders that came into the currency market from stock markets around the world. In other words, they were a stock trader in their “home” market before venturing into the currency market. What they usually don’t realize is that their stock market knowledge could help them in the currency market.
For instance, the German DAX has been “perking up” lately. It broke a recent downtrend line and has also recently come back up above its 200 SMA (which is more than most U.S. indexes can say right now). When big institutions start to see this, they start to funnel money into that market. So not only do Europeans invest in the DAX but foreigners to that market do too.
When they want to invest in that market, they have to “sell” their home currency and “buy” the home currency of that market. In this case, that would be euros. Since Americans have become such huge international investors, I look to the EUR/USD pair.
Americans would have to sell their dollars and buy euros before they can purchase a stock priced in euros. This helps the EUR/USD exchange rate to head higher as the DAX improves. Also, as their stock market improves, so does the sentiment for their country and therefore their currency overall too. This is another reason why it would cause the euro to prosper.
General Exception to this Rule: Many times, the dollar will do THE OPPOSITE of its stock market. Therefore, as the U.S. stock market recovers, the dollar historically plummets and as their stock market tanks, traders run into the “safe haven” of the world’s reserve currency….the dollar.
This effect really adds to the EUR/USD trade as both the DAX and U.S. stock markets perk up. So if you are new to currencies and are still “getting your feet wet” there, but have strong opinions on where the stock market indexes are going….then maybe you have a much better grasp on where currencies are going and you just didn’t know it.
Cick on the chart to enlarge it.
Sean Hyman
Tags: blog, currencies, currency, currency market, dollar, dow, downtrend, EUR, Euro, Europe, forex, forextrading, home, index, invest, investor, money, pair, rate, Sean Hyman, sentiment, stock, time, trade, trader, U.S., USD
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