Intermarket Analysis Chart 1

In the above example, you have a comparison of AUDUSD Vs NZDUSD. Both the pairs are highly correlated so although there are fewer opportunities and the opportunities are smaller there are still plenty of cases where profits can be made. As you can see there is never more than a 3-day period where the divergence in this time frame does not converge back.


In the below example we have a negatively correlated pair of oil and the USDCAD rate due to the high importance of oil in the Canadian economy.  When trading a negatively correlated pair what you are looking to do is place the trade when they have moved furthest against the other symbol and then ride back the narrowing of this gap. Just in the below example, there are numerous occasions where you can find the larger divergences. The main issue is it is very hard to say when the divergence has got to its maximum point so you do not want to overtrade and then have to close out your position at a loss before it has the time to converge back on each other.

As you can see in the above example they do not always cross back over each other shown in yellow. The price may start to converge but then move back out which is why many will do a manual take profit and not leave anything in the market.

Intermarket Analysis Chart 2

The above example shows the overlay chart of Gold (XAUUSD) Vs AUDUSD. As both are traded against the USD, and AUD and gold are highly correlated it gives you a great overlay. You will want to look closely at the period of divergence. If the divergences are significant you will want to check them against the news to see if there are any reasons for the divergence or the large swing.

The main thing to look into is how you are going to trade the divergence. There are two ways, one is to put only one trade on, looking at the predominant trend. You will find that one will usually lag the other so in the above example you can see that gold price slightly lags the AUDUSD rate. So this means that that you would want to trade against the gold price as this is weaker.

Issues

An issue with this method is that due to you only placing one trade, you are putting in a directional trade. So even if there is correlation and the converge back together you can still lose in the trade as the market has gone with the weaker currency. But on average you should come out ahead.

The second way to trade this is to go long and short at the same time. So in the above example where you have the first blue line you will want to go long AUDUSD and short gold. Then when the two prices converge back to each other you will want to close out the trades. This way the profit on one will outweigh the loss or smaller profit on the other trade.

When using this strategy, you need to make sure that the trade sizes are equal as you do not want a larger position in one so that the losses on that position outweigh the profit made in the other.  

Intermarket Analysis Chart MT4 USDCAD WTI

intermarket analysis



Intermarket analysis helps you to trade on divergences and convergences between relating markets which can produce some very profitable trades with high success rates. You want to look for and exploit relationships between different markets.

Unfortunately, in trading, most people completely ignore this side of trading and look at each individual product in isolation. But as we all know with the market growing ever more complex and intertwined Intermarket analysis is becoming more favored with the institutional traders.

Examples

AUD Vs Metals – Australia is a very large producer of raw materials such as iron ore and normally benefits in commodities upcycles. So when metal prices are increases the AUD will increase alongside it.

CAD Vs Crude Oil – Canada is one of the major oil exporters in the world and its economy can be tightly correlated with the commodity cycle. The decrease in Oil prices can lead to a weakening in CAD.

AUD Vs NZD – Australia and New Zealand have economies that are closely coupled and therefore they tend to move in sync.

JPY Vs Commodities – Japan is a very large net importer of most commodities and due to this when commodities rise they are sensitive to the cost and which is negative for the Yen. 

Stocks Vs Bonds – These tend to have an inverse relationship so if stock prices are rising the bond prices are usually falling and vice versa.

FTSE Vs Commodities – The FTSE 100 is very heavily dominated by mining stocks and due to this any changes in the underlying prices of the commodities will have an effect on the index. Higher commodity price will be coupled with a higher FTSE price.

Oil Vs Base Metals – Both can be highly correlated due to the price being a function of supply and demand. When economies are doing well they consume more of both and there for prices increase in a strong economy and decrease in a weaker economy.

Precious Metals Vs Interest rates – Rising precious metals price often signal increasing inflation and as such higher interest rates can follow.

AUD, NZD, CAD Vs Interest Rates – Global interest rates will rise in a commodity upcycle and that will lead to a strengthening of currencies highly correlated to commodities.

 

There are many interconnections in the market with the above examples just a few of the major correlations.

Strategy

Rules


  • You need to find highly correlated products with at least a +/- 0.6. (this can be done with indicators)
  • Spot instances where there is a divergence from the correlation when the two markets move apart.
  • Trade against the weaker market or both
  • Wait for the convergence to close the trades