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FX Pimp · #2 (**permalink**) 07-19-2008, 09:19 PM

Now we all know how difficult it can be to cover 10 currency pairs, 4 indices and 2 commodities over 4 different timeframes, so what we will do in a while is just tile 6 charts.

Firstly allow me to explain why I look at Gold and Crude and how these two beasts will eventually make you a lot of money.

The 4 major currency pairs are USD related. GBPUSD EURUSD USDCHF USDJPY.
Gold and Crude are also Dollar related.
If America's economy is performing very well then the Dollar is strong, but as we have seen over the last few years, with a weak economy the Dollar is weak.
This gives rise to buying of commodiites such as Crude and Gold.

To term an analogy, which you'll come accross quite a bit over time reading this thread as it develops, let us for simplicity's sake see the whole financial market as a huge Football Club
Crude oil at the moment is the Chairman of the club, the ultimate decision maker, the boss of all bosses. He gives orders to the coach/manager, who is Gold, and this manager then screams instruction to the players, who are.........yes, you guessed it, the four major currency pairs.

As an example, is EURUSD going to rally strongly if Crude is falling heavily?
Well the simple answer to that is 'probably not'
Why? Both EURUSD and GBPUSD are Dollar suffix pairs. Euro before Dollar and Pound before Dollar. These 2 pairs will generally move in the same direction as Gold.
Remember, strong Gold = weak Dollar.
USDCHF & USDJPY are Dollar prefix pairs. Dollar before Swissie & Dollar before Yen. These will tend to move in the opposite direction of Gold.

So why isn't EURUSD going to move up if Crude is dumping.
In a nutshell if Crude is falling heavily like we've seen the last few days, then it's highly likely that the manager of our club, Gold will also be falling. This in turn will add weight to the strength of the Dollar overall and thus EURUSD would fall also. GBPUSD would probably also fall, whilst USDJPY & USDCHF would most likely go up.
Tile a daily chart for EURUSD and Gold horizontally and you will see what I mean (attached now)
Now tile a chart with USDCHF and Gold and you'll see that they are almost perfectly opposite.

So you can already begin to save some valuable pips by not going short on EURUSD & USDJPY at the same time as generally they travel in opposite directions.
There are times when EURUSD & USDJPY will seem to be moving in the same direction for a while. In these cases we look at EURJPY. Why?
Back to the football. If Man UTD can beat Liverpool and Liverpool can beat Real Madrid, then Manchester UTD should be able to beat Real Madrid......
The same is true for currencies. If Euro can beat Dollar (EURUSD bid) but Dollar can beat Yen (USDJPY bid) then Euro can surely beat Yen. This will see EURJPY move aggressively to the upside.
I'll talk more about these other correlations another time and to save confusion lets stick with the Majors for now.

UPDATE 28/10 The JPY has become really strong lately against all currencies, The correlation of this pair, and to a certain extent, the Gold and Crude, so although these are good indicators. They are not completely what this strategy is about.

UPDATE - The chairman has been fired. Crude is no longer the daddy of the firm, and the new boss is Dow Jones.
Euro and Cable are still following Gold to a certain extent but all the currencies are being pulled around now by Wall St.
If you play London hours then get wall street futures charts up, they are open 24hrs.

If you want to follow crude then do so but very limited amounts of people outside u.k have the capacity to do so and it could be outed.