How to Use Oil Prices As A Signal in Currency Exchange
If you have ever traded stock, then you understand the importance of buying or selling when stocks split or when the company buys back shares. It’s true. Similarities between the stock and currency markets exist; but, success in currency exchange entails understanding the relationship between currency pairs. The pairing of the US Dollar and the British Pound proves a dependence between an import and export economy.
Oil and Export Economies
More analysis of the Pound as a leading exporter demonstrates the significance of oil in conducting business; there are shipping costs and other business costs. Yet, the Japanese Yen gives another scenario of the point that oil plays a major role in export. Traders should beware. Attention to the national average gas price and movement of stock related to oil will be strong signals in a currency exchange. So, the trading signal provided by a stable national average gas price should work in both the Dollar and Pound and Dollar and Yen exchanges.
But first, understanding the link between oil and gas allows traders a view of the numbers related. Specifically, in the energy industry the Crude-Gas Ratio measures the value of crude oil and gas; eventually the demand for one or the other causes an increase in prices. Do the math. Because the link between oil and gas carries significance traders should take an advantage when market forces shift both together.
National Average Gas Price
In brief the national average gas price should provide a reliable entry signal for exchanges between the British Pound and Japanese Yen. Clearing a long-term link between oil and gas, traders would only have to use historical data on gas prices as a point of entry into a trade. When the national average gas price holds steady, fluctuation less than $.05 for more than 200 days initiate a trade.
Next, movement of oil and gas related stocks can be a strong exit signal for traders in the energy industry. After market forces move both oil and gas prices together, the energy industry has to react. The 2008 crisis prove a downward shift in oil prices during the recession; then, around 2012 an increase in oil prices and decrease in the price of natural gas. So then, oil and gas companies begin to look for a profit and decide to drill for oil. The "long-run" link between oil and gas occurs. Finally, the stock market rebounds after oil and gas companies look to support from related business and products.
Entry and Exit
To demonstrate a reliable exit signal for a trade of the Pound or the Yen, the movement of pricey, blue chip stocks gives a reference point for traders. Blue chip stocks perform the duty of insuring the respective industry financial depth; you respect the stock because of its ability to close gaps in the market. So, when wide-spread movement of blue chip stock occur, it is expected that several other things are happening. It is important to study. Most markets including the NYSE, S&P 500, FTSE, etc feature several blue chip stocks in respect to industry.
The movement of oil and gas related stocks in the energy industry gives a strong exit signal. Traders should expect links because of the causation. For instance, in the energy industry, the blue chip stock CAT or Caterpillar presents an example of how oil prices affect certain currency exchanges. The Dollar and Pound exchange allows a support of the movement of oil related stocks.
When participating in an exchange, knowing the relationship between the currency pairs allows for confident entry and exits. The use of oil prices as a reliable signal in trade can lead to profits. Referring to stable national gas average prices and the movement of blue chip stocks will improve your trading strategy.
Visit Forex.com for more analysis and trading tips. Research the major currency pairs and the factors that affect them.
**SOURCES
-https://www.cmegroup.com/education/articles-and-reports/
