This article is Part 3 of a series of 9 articles dedicated to help anyone to trade the foreign exchange.
Very few spot forex traders conduct any form of parallel and inverse analysis of the major pairs and exotics to determine the best way to trade the forex on a day-to-day basis. Even though it would be nearly impossible to trade the forex successfully not knowing where the overall strength and weakness was in the spot forex across multiple pairs.
Lets look at some examples. Many people like to trade the GBP/USD they spend countless hours losing sleep waiting to trade this pair even when no trend or parallel/inverse confirmation is available. Losses occur. They could increase their odds dramatically by setting up some entry rules and examples like the ones shown below.
Only buy the GBP/USD if the GBP/CHF and GBP/JPY are strengthening as well. This would be parallel confirmation on the GBP strengthening across the board.
Only buy the GBP/USD if the EUR/USD is strengthening and the USD/CHF is weakening. This would be confirming the entry with two other pairs and across the board weakness in the USD. In either situation you have confirmed the entry with at least two other pairs. Both of these entry rules would include a stop order, and you can enhance the rules further by examining the EUR/GBP for weakness. This is inverse confirmation.
But this is not what traders do. They want to trade the GBP/USD so badly that they manufacture a trade, or the they want to use indicators, or trade the news. This is a mistake and is equivalent to betting or gambling. There is no logic to support the entry, the forex works in a logical way. Lets look at some other examples. Lets say you prefer to hold carry trades and prefer to trade the GBP/JPY, you could set up rules for entry as follows:
Only buy the GBP/JPY if the GBP is strong across the board based on parallel and inverse pairs, or only enter the GBP/JPY if the GBP/USD and USD/JPY are both strengthening somewhat or a lot. In the second scenario the GBP/JPY will slingshot upward at a very fast pace.
Or another scenario is to only buy the GBP/JPY if the EUR/JPY, CHF/JPY and AUD/JPY are all strengthening as well, in this case the USD is not in the picture because of across the board weakness in the JPY. Either way you have confirmed the entry with other pairs.
Another example would be to buy the USD/CAD only if the EUR/CAD and AUD/CAD are also strengthening.
Similar rules can be applied to any major or exotic pair and easily monitored upon entry. In the case of the three CAD pairs, if you also do a careful analysis of support and resistance, you can trade the pair with the most potential rather than just trading the USD/CAD.
But this is not what traders do, they get stuck trading the same pair and wind up justifying a trade when a trade is not there. These trade entries are not based on logic they are based on emotional needs. This leads to losses. The forex works in a very logical process and you must let the logic work for you. Stop looking at indicators and start looking at other pairs to support your entries, these are the best indicators available.
Across the board strength and weakness in groups of pairs occurs weekly in the forex. But if you search the internet far and wide you will see that it is rarely and in fact never discussed by traders, analysts, and trade planning services charging hefty monthly fees. People are too busy looking at indicators and absolutely no discussion of the market forces governing the spot forex ever occurs.
It is very rare if nearly non-existent for one forex pair to move strong without other pairs to confirm the move. This is true for any major or exotic pair. If you are stuck trading the same pairs while other pairs and exotics are making strong moves its time to look at all of the pairs every night then pick the best opportunities based on parallel and inverse analysis.
In order to trade the spot forex daily and weekly, you must analyze 15-20 pairs every day to determine the current market forces, this will lead to less entries, more logical entries, and better confirmation of entries when the movement starts. Parallel and inverse analysis is the logic behind the spot forex.
About the Author:
Mark Mc Donnell is the lead trading plan writer for an inexpensive trading plans service available to all spot forex traders. He is also the developer of The Forex Heatmap http://bestforexfree.blogspot.com
He has many years of experience trading stocks, equity options and the spot forex. He has spent the last four years of his career devoted solely in studying the movements of the spot forex, conducting trend analysis, and determining how this impacts retail level forex traders.
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