How the Forex Market is Related to the Stock Market

It’s time to learn How the Forex Market is Related to the Stock Market.

The financial markets are all woven together like a giant spider web. Everything that happens has a ripple effect that impacts other parts of the market. How the Forex Market is related to the Stock Market is one of the strongest correlations we want to worry about as Forex traders. Though correlations are often changing frequently, the correlation between stocks and the Forex markets have been consistent for many years. This correlation is what investors refer to as “Risk on” and “Risk off” theme in the markets.

How the Forex Market is Related to the Stock Market: RISK ON

When we talk about this correlation in Stocks and Forex, we are mainly referring to the Stock Markets going one way or another, and the Forex Markets reacting to this. “Risk On” is what we refer to when the Stock Markets are performing bullish, and prices are moving higher. The overall sentiment and perception of the markets in a time of “Risk On” is that investors are willing to risk more, for a chance at more reward. This typically happens in a time of certainty, when we have strong economic data and fundamentals to support growth in the markets. Investors and anyone taking part in the financial markets are pulling money out of lower risk assets and putting money into the higher-risk higher-return assets.

How the Forex Market is Related to the Stock Market: RISK OFF

When we talk about “Risk Off” in the markets, we are talking about the exact opposite of “Risk On”. This refers to a time when the overall sentiment and perception of the markets are bearish, and prices are moving lower. This typically happens in a time when there is uncertainty in the economy. It can also happen with any uncertainty- such as a natural disaster, terrorist attack, or political events. This leads to investors pulling money out of higher-risk higher-reward assets, and moving them into lower-risk, safer assets.

How the Forex Market is Related to the Stock Market and How Can We Use This to Trade Forex

When we have a “Risk On” theme in the markets, money is leaving the lower-return assets and being relocated to the higher-return assets, as we mentioned before. We can use this as Forex traders because certain currencies perform better, and others worse, during this time. When we have “Risk On” we typically see money moving out of the JPY and CHF, as these are referred to as Safe Haven assets. Money is then moved into the higher-growth currencies AUD, NZD, and CAD. What this means to us, is that we can use the fundamentals during “Risk On” to line up our trades and expect to see a weak JPY and CHF, and a strong AUD, NZD, and CAD. Though this isn’t always 100%, it is still around 80% correlated- so 80% of the time we can expect to see a weaker JPY and CHF and stronger AUD, NZD and CAD when the stock markets are moving higher.

When we have a “Risk Off” theme in the markets, money is typically leaving the AUD, NZD and CAD currencies and moving into the JPY and CHF. This allows us to line up our longs for JPY and CHF and shorts with AUD, NZD, and CAD when the stock markets are moving lower. This can provide us with a very high probability trading setup, especially when it lines up with our technical analysis.

These “Risk On” and “Risk Off” themes are a correlation in the markets that most novice Forex Traders don’t use or even know exists. It is something I have learned trading professionally with proprietary trading firms, and most retail traders never learn about. By simply adding this fundamental correlation to your trading plan, you can catch moves that most traders never see coming. It is a great tool to have in your box, and is one of the many aspects that sets professional traders apart from amateur ones.

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