Trading is a complex art. Whether you choose to dabble in the stock market or invest in the strength of specific currency pairs, there are a variety of facts, figures and parameters you will always need to be careful with. However, one question that many traders ask – even those with plenty of experience – is, Do big-name stocks affect forex pairings?
The fact is, both forex value and stock performance can affect each other – though not necessarily negatively. Before choosing a forex broker for the first time, it makes sense to look closely at factors that could affect the money you stand to make in the long run. How do stocks and forex go hand in hand?
Stock interest equals currency interest
It stands to reason that, in practice, a company that performs well on the stock market may entice investors from overseas. Big stocks in companies such as Tesla, Apple and Amazon, for example, are all based in the US. This means that, hypothetically, international forex traders may see such success as a sign that the USD is robust and reliable. To some extent, it is a self-fulfilling prophecy.
It’s also worth noting that underperformance in territorial stock exchanges can lead to investors jumping off. Concerns surrounding Brexit in recent years, for example, have led to significant changes in British and European stock. Thus, both GBP and EUR have seen fluctuations. GBP, in particular, saw a considerable dip following Brexit, though it is still widely traded.
Therefore, before trading in forex, it’s worth looking at major stock players in the territories you wish to pair up with. For the most part, USD is a safe bet.
Is this link the most important factor to look for?
While links between the stock market and currency value are important, they may not be the biggest parameters you should measure. After all, one of the significant drawbacks of investing in forex lies in the fact that they can take hits due to global, regional, or political issues. It’s what has driven many traders to invest in decentralised cryptocurrency.
That said, you shouldn’t place political shifts on a pedestal. Unfortunately for newbie traders, forex – while highly lucrative when diversifying – can get complicated when you look at all the factors in play.
Is this link positive or negative?
The link between stock performance and exchange rates shouldn’t always be seen as potentially negative. For example, it stands to reason to suggest that a weak currency may mean that stock becomes more tempting to overseas buyers. This could lead to an upturn in profit for some companies, too.
You should also consider choosing a somewhat disparate pair to make money on forex regardless of a downturn in specific markets. For example, if you were to select USD/CAD as a pair, and CAD takes a tumble due to market issues, you still – at least – have USD to fall back on.
USD/CAD is an excellent example of what could happen. CAD is, by and large, highly affected by the oil market. Therefore, companies affected by oil shortages/dips in this market will likely drive down CAD’s value. It’s a good idea to have a leading currency such as USD in place – it remains the most popular “backbone” in forex, making it worthwhile to rest on.
Isn’t forex volatile?
Yes – the sheer fact that international currencies dip and rise with regional matters means that one day in the markets will never be the same as the next. Therefore, you always need to stray away from black and white thinking. Just because the US plays host to huge stock market leviathans doesn’t mean that USD isn’t going to take a dip at some point.
It’s, therefore, a good idea to take trading in forex very carefully – and perhaps even slowly to begin with. It’s a reason to ensure you work with a broker or brokerage who can guide you through what to expect and help you make decisions that would otherwise be difficult to manage.
Another great place to start will be to consult a forex glossary – there are plenty of different terms, phrases and strategies out there that can seem confusing when you first start trading.
It’s reasonable to assume that the stock market’s performance in a given country can and will affect forex pair values. However, the picture is much bigger than it may seem – be willing to do your homework first!