The market overall can be separated into four primary elements – they can also be referred to as markets in themselves. These are the markets of currencies, stocks, bond prices, and commodities.
Now, what do they have to do with the market overall for a trader?
Well, believe it or not, even if you trade only currencies, you have to pay attention to the rest of the primary markets as well. This is because they follow a cycle. But that’s not everything. They follow a cycle/pattern in a way that helps traders predict the market movements and, ultimately, make better/smarter trades.
Let’s take a closer look at intermarket relationships and at how you have to follow the cycle when trading!
The Push and Pull of the Intermarket
If you trade gold, bonds, and interest rates, you might have noticed that the currencies market affects and is affected by these. For example, if the price of a certain commodity increases, the bond prices will eventually fall. Why? Because the increasing price causes the rise of interest rates and of inflation. Due to growing interest rates, bonds will go down.
This is the relationship between commodities and bonds. But then, bonds and stocks are also in a tight relationship. However, they are actually more connected to each other, so to speak. When bonds go down, so do stocks, mainly due to inflation. It’s also important to keep in mind that they won’t go down at the same time – stocks will lag a bit behind bonds.
Ultimately, currency affects all markets. If the price of a certain commodity is affected, then bonds and stocks are also affected – with inflation in-between as well. As such, it goes without saying why currency will affect everything once one of the primary markets starts to move.
The Cycle of the Intermarket
The difficult part is that there’s no clear, concise cycle that can be followed. For example, the markets can move in this direction only – currency, then commodities, then bonds, then stocks (then currency again, to start a new cycle).
However, the downside is that the starting point can be any given element within the cycle. Instead of currency, we could have bonds as starting points, and then stocks, then currency, commodities, and so on.
This direction also determines what market is going to be affected. For example, if currency is the starting point and moves to affect commodities, then bond prices will be affected as well.
It is also worth mentioning that, due to response lags between the market movements, sometimes the markets are moving the other way around – namely in opposite directions.
The Bottom Line
As you can see, this is a complicated aspect of the trading world. You cannot learn about the complex relationships between the markets if you’ve kept track of only 1 cycle in your trading career.
There are multiple types of cycles and, since the markets can move the other way around as well, even more trading opportunities.
Ultimately, in order to follow the cycle, you need to first master the markets and then learn how to predict which one will be influenced the most by the movements of the other markets, more or less.