Most experienced traders know that there is a strong negative correlation between the U.S. stock market indices and the U.S. dollar. When one moves, the other tends to follow, but in the opposite direction. Right now, with the major indices like the Dow Jones Industrial Average and the S&P 500 falling in price so sharply, it seems like the dollar should be jumping up in price. Whether or not this is the right move, though, is a different story.
First, you need to pick the right currencies to pair it with if you are going to take this strategy as your own. The EUR/USD pair is by far the most popularly traded asset in the Forex world, but because it is so strong, it will sometimes be immune to sudden wild price swings. The dollar has gotten stronger, but not enough to make this a worthwhile trade.
If you are a short term trader, either in the Forex market or in the binary options market, a stronger potential money making trade is currently the USD/JPY. The Japanese yen has been struggling because of the situation in China lately, and the dollar is cleaning up in a big way because of it. The other strength to this currency pair is the fact that the yen is so small compared to the dollar that the price manipulation between the two can sometimes be more easily felt.
The reality is that when indices move, the price of the dollar does too. The big thing to remember is that there is usually a lag between the two, and over the immediate short term, there is likely to not be any noticeable or predictable pattern visible to the naked eye. If you are going to trade this currency pair over the ultra short term (60 second binary options or constant leveraged trading in the Forex market), make sure that you are going to test your trades out with a firm grasp on technical indicators. Different indicators rely on different pieces of info, so ensure that you are using information that you understand and that readily applies to the trades you anticipate making.
For example, many top experts believe that the dollar is actually too strong against the yen right now, and that the yen will gain against it over the coming days and weeks as a correction takes hold. Once this happens, assuming that it does happen, determining trades will be much easier. Predictive models will have more info to work with, and your trades will benefit more as a result of this. By delaying trades like this involving the U.S. dollar, you also are giving the recent drops in stock prices all across the board an adequate period of time to apply themselves to the dollar’s worth against other currencies, so you will have better information in this respect, too. All of these concepts will help you to better your correct trade rate right off the bat, so you can risk larger amounts of money and increase your profit making potential.
Is it possible to predict patterns without this happening? Yes, of course it is. The point is that unless you are relying on very accurate technical indicators, you are more likely to run into problems than if there were more stability and this situation had more time to play itself out. Once the inverse relationship between the index drop hits the dollar, then predictability will increase, but until then, these trades are much riskier over the short term, regardless of the vehicle you are using to trade them with.
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