Forex Analysis Using Parallel and Inverse Currency Pairs
Forex analysis with parallel and inverse pairs can be learned in a very short period of time, perhaps in just a few weeks. This analysis method can be used two different ways, when conducting the overall market analysis using trends and the larger time frames, and also at the point of trade entry to increase overall trading accuracy. This article will increase your understanding of these these parallel and inverse pairs concepts, as a forex trader the information is critical.
What Is Forex Analysis With Parallel and Inverse Analysis
Parallel and inverse analysis is the study of how individual currencies influence the movements of currency pairs and their intra-day movement cycles or within the context of a trend. It has also been called currency correlations, individual currency analysis, and currency strength and weakness. Forex trader's success would skyrocket if forex traders would master these concepts. Forex analysis with parallel and inverse analysis pairs can be learned in just a few weeks by any forex trader at any level. If a forex trader is having no success or good success with their trading, this article will improve their pip totals. And these traders will redefine what successful trading means.
Forex Analysis For The Eight Major Currencies
Here are the eight most widely traded individual currencies in the spot forex that we will examine in this article: The USD US Dollar, CHF Swiss Franc, EUR Euro, GBP British Pound, JPY Japanese Yen, CAD Canadian Dollar, AUD Australian Dollar, and NZD New Zealand Dollar. Remembering that a currency pair is comprised of two separate currencies will open your eyes the correct way to conduct a market analysis and more pips will begin coming your way. We will examine these 8 currencies and a total of 28 pairs with the parallel and inverse methods.
Parallel and Inverse Pair Grouping Examples
Three examples of parallel or inverse groups of currency pairs are as follows.
EUR/USD USD/JPY NZD/USD
EUR/JPY EUR/JPY NZD/JPY
EUR/CHF CHF/JPY NZD/CAD
EUR/GBP GBP/JPY NZD/CHF
EUR/CAD CAD/JPY AUD/NZD
EUR/NZD NZD/JPY EUR/NZD
EUR/AUD AUD/JPY GBP/NZD
In the first group of pairs on the left, the common currency is the EUR (Euro), in bold letters. It is the base currency. When the EUR is strengthening all of these pairs must all be moving up. The second group of pairs is the JPY pairs. If the JPY is strengthening all of the JPY pairs would have to be dropping since the JPY is not the base currency, it is the cross currency on the right side of the pair. Now look at the third group of currency pairs, the NZD pairs. For the NZD to be strengthening the top 4 pairs would all have to be rising and the bottom 3 pairs would have to be falling.
This seems strange at first to traders who have been stuck using standard technical indicators, but some traders see this graphic and a big light bulb starts flashing. They start to realize they have been missing something simple and powerful in their forex trading. Use this same logic for 8 currencies and 28 pairs total.
How and Why Currency Pairs Move
Forex analysis with parallel and inverse pairs will explain why currency pairs move and how fast, which is vital information to forex traders. Lets look at some simple examples.
First example - If the EUR/USD is rising and the USD/CHF is falling, then the USD weakness is controlling and "driving" the movement of both pairs, the USD is weak. You have confirmed the movement with two pairs. We can show you how to confirm movements with up to 14 pairs for more confident trading.
Second example - If the EUR/USD is rising and the USD/CHF is also rising (both pairs going in the same direction) then then the USD is not controlling the movement. The EUR strength is causing the EUR/USD to move higher and the CHF weakness is causing the USD/CHF to rise. In this case the EUR is strong and the CHF is weak, so the best pair to trade would be to buy the EUR/CHF. The USD is completely out of the picture in this example as far as what was driving the driving movement of the market. Once again you have confirmed that buying the EUR/CHF is the correct trade, and you ave verified this with two pairs. Later in this article we will show you how to confirm the same trade or any trade with up to 14 pairs.
These are two of the most basic examples. Simple techniques like this and conducting a forex analysis using parallel and inverse pairs will always get you into the pips and the main action of the market.
Third Example - If the AUD/USD is rising and the USD/CAD is falling, then the USD weakness is controlling and "driving" the movement of both pairs, the USD is weak.
Fourth Example- If the AUD/USD is rising and the USD/CAD is rising, then the USD is not controlling the movement and the best pair to trade would be to buy the AUD/CAD. This is the same logic as the examples above, but this time we are using different pairs and currencies. This logical way to conduct a forex analysis works on any currencies or any pair.
Once again, each currency pair has two individual currencies, by looking at currency pairs in the same groups of pairs, once currency at a time, you can quickly determine what is driving the movement. In the case if the AUD/USD and USD/CAD example these pairs can be moving in the same direction or opposite directions, or on some trading days not at all.
Analysis Of Forex Trend Cycles
Parallel and inverse pairs can also be used for much more accurate trend analysis than analyzing individual pairs on a stand alone basis. In the example below we will use the EUR/JPY for our trend analysis example, but the same logic applies to all 28 pairs we track. The EUR/JPY has been dropping for several days on th H4 or D1 time frame based on some simple forex trend indicators like our exponential moving averages. Then the pair stalls at support. You can check several EUR pairs or several JPY pairs over the same time period on the horizontal x-axis and quickly determine if the downward movement on the EUR/JPY over this time period was based on EUR weakness or JPY strength, or possibly both.
If the EUR/CAD, EUR/GBP, EUR/USD, EUR/CHF, etc., are all falling over the same time period then EUR weakness is driving the movement over this time period and the down cycle on the EUR/JPY. If the GBP/JPY, CAD/JPY and AUD/JPY are all falling over the same time period, then the JPY strength is the reason that the EUR/JPY dropped. This is an incredibly simple method of forex analysis, but completely ignored by almost all forex traders. Doing trend analysis on the EUR/JPY and not analyzing the EUR and JPY separately will give traders and incomplete picture.
Next, the EUR/JPY stalls at support, at Point 1 on the example chart above. If it reverses back to the upside off of support at Point 1, once again checking several of the EUR and JPY pairs will quickly tell you if EUR strength or JPY weakness is driving the EUR/JPY back up off of support. This is so simple but ignored by almost forex all traders.
Now apply this exact logic to any one of 28 currency pairs comprised of the eight major currencies. Almost immediately you will start to understand why currency pairs move. You will also start to get many more pips out of your trading using the basic individual currency analysis method for trends. This logic presents itself daily to forex traders but almost no forex traders notice. The forex technical analysis indicators and systems available now to forex traders do not take this simple individual currency analysis logic into account and these technical analysis systems are all fundamentally flawed. The parallel and inverse method of forex analysis is superior to any technical analysis or any single pair analysis methods.
Total Market Forex Analysis Using Parallel and Inverse Pairs
You can analyze one currency pair with parallel and inverse pairs. You can also analyze one currency, and now you can analyze the entire forex market accurately. When we say total market analysis we are referring to the 8 most commonly traded currencies currencies and 28 pairs.
Traders should always analyze all of the USD pairs together, then analyze all of the JPY pairs together, then analyze all of the CAD pairs together, etc. If traders do this every day, the trends of the market, oscillations, ranges, and consolidation cycles will jump out at you right off of your computer screen trend charts and into your lap. If a particular group of pairs are all behaving the same way the market becomes a heck of a lot easier to trade. It is also very easy to spot choppiness or a more difficult market and you may consider not trading at all today, and with good reason.
Also, if you are already in a trade, deciding to stay in the trade becomes much easier. For example, if you buy the AUD/CAD and the AUD/JPY and AUD/USD are also trending up it’s a lot easier to make an effort to stay in the trade for a longer period of time based on overall AUD strength. Solid logic.
For professional forex analysis traders can use our handy forex market analysis spreadsheet to analyze any pair or currency this way every day. Check the link for more information about this professional analysis tool. You can fill out the spreadsheet for one currency on the H4, D1 and W1 time frames to check for consistent movement in one direction. In the example below you can see how it would work for the Swiss Franc CHF pairs, but the spreadsheet works the same way for 8 currencies and 28 pairs.
How Currency Pairs Are Constructed
Currency pairs consist of two items, the base currency and cross currency. Traders must separate the pair into two separate currencies, then analyze each one. The EUR/USD is composed of two individual currencies each with their own separate behavior, fundamentals, interest rate, strength or weakness, current condition, news releases, and reasons for moving up and down. In order to analyze the EUR/USD you must analyze the EUR currency separately and the USD currency separately. Always separate the EUR/USD into two separate currencies, the EUR and the USD, and analyze each currency separately. Both currencies might be moving in the same direction or opposite directions. The minute you start to view the EUR/USD as two separate currencies and analyze each currency separately then you have an excellent chance of success. This logic works for any pair.
Individual Currency Strength and Weakness
Almost all forex traders apply technical indicators to currency pairs, but after they learn the individual currency strength or weakness concepts, they abandon indicators forever. For an example, back to the EUR/USD again. If you buy the EUR/USD the only way it will rise is if the EUR as an individual currency is strong or the USD as an individual currency is weak or both. The best scenario is both because the EUR/USD will appreciate the fastest under these conditions.
Buying the EUR/USD implies buying the left (base) currency and selling an equivalent amount of the right (quote) currency to pay for the base currency. For example, buying EUR/USD means that you are buying Euros and using US dollars to make the buy, and simultaneously selling US dollars. Technical indicators do not take individual currency strength or weakness into consideration. We strongly suggest that forex traders start their forex analysis with parallel and inverse analysis groups of pairs to analyze individual currencies for better market analysis.
Forex Analysis of Trends
This picture below is a continuation of the previous image. The EUR/JPY stalls at support at point 1 then forms a new uptrend off of support. The black line represents the movement cycles and consolidation cycles on a conventional price chart like a bar chart, simplified with a black line. Each individual up cycle within the trend is either EUR strength or JPY weakness or both. Nothing else. It’s that simple. Throughout the course of the trend on any time frame the movement drivers could be the EUR strength or the JPY weakness on a day to day basis because the market dynamics can change day by day. In between the movement cycles the pair consolidates or retraces. Thes movement and ocnsolidation cycles will accurately define any trend for any time frame.
WHAT IS A FOREX TREND >> Remember that a trend on a currency pair is a long series of movements and market dynamics on both sides of the pair that favors movement in one direction. In this case each upward movement off of support is EUR strength or JPY weakness. This same concept of forex analysis works on all 28 pairs we follow, or any other currency pair for that matter.
Analysis of Ranging and Choppy Markets
Generally speaking a ranging market can take on two forms. Currency pairs ranging up and down in large oscillations that are smooth cycles, easy to spot and trade. The other form is a tight ranging choppy market that are so difficult to trade that it is best to trade for less lots or not trade at all. In a tight ranging market the market drivers, or currency pairs pushing movement, changes almost daily. Employ the correct range trading strategy as necessary depending on the market condition.
One day the AUD is strong the next day the CAD is weak and the next day the USD is strong, etc., and it just continues for days and days. In a trending market the market dynamics change far less frequently. In a choppy market the individual currencies driving the movement change much more frequently, almost day to day. Or else the same group of pairs moves in different directions on consecutive days, for example the USD is strong one day and weak the next. Each currency pair has two separate currencies, so either currency in the pair can be driving the movement. If you can identify what parallel and/or inverse group is driving the market you can successfully trade every day, but in a choppy market the trades will be short term or intra-day trades.
Traders should be able spot a difficult to trade, choppy forex market rapidly using parallel and inverse pairs. If you conduct a multiple time frame analysis on the USD/CHF and the chart looks choppy, or it has tight trading ranges down to the H1 and M30 time frames, immediately go to the other USD pairs and CHF pairs to confirm. If all of the USD pairs look the same or all of the CHF pairs look the same you have confirmed that that pair or group is choppy. You may still be able to trade another pair then check the USD/CHF again tomorrow. Remember that currency pairs move because one currency is strong and the other is weak. In a choppy market both currencies might be strong or weak, creating the "tug of war" that leads to choppiness.
Conversely, identifying a trending market will become much easier as well by checking the parallel and inverse pairs. If the USD/CHF looks like it’s in an uptrend a quick check of the USD and CHF pairs will confirm the trend. Your trading confidence will skyrocket, and after some practice, become second nature.
Parallel and Inverse Analysis For Trade Entries
Forex analysis with parallel and inverse pairs can also be used for guideing successful trade entries. The number one question forex traders have is "When do I enter the trade??", quite naturally. Once again parallel and inverse analysis will solve this problem. After you analyze the forex market trends and you write up your trading plan, you can then set your audible price alerts at critical areas of support and resistance across some key pairs. When the alert systems go off in the main trading session, or after significant forex news, parallel and inverse analysis can be used for accurate trade entry management.
This image is for a real time visual map of the spot forex is called The Forex Heatmap®, and it give traders a live forex analysis of which individual currencies are strong and weak. The heatmap utilizes parallel and inverse analysis to tell a trader what pair to enter and in what direction across 28 pairs and the eight major currencies. The basis of the heatmap is parallel and inverse analysis and individual currency strength and weakness. In this example above the CHF is weak, and using parallel and inverse analysis you would possibly sell the CHF/JPY or buy the CAD/CHF. After trading with tools like the heatmap and using parallel and inverse analysis, trading the forex market with technical indicators becomes completely obsolete.
Next step is to put all of the CHF pairs on one screen. Doing this will change the way you think about forex trading forever. This correlated pairs chart setup will match the heatmap. The principles of parallel and inverse analysis can also be applied to gold to give you a superior gold trading system if you trade this asset.
Final Thoughts On Parallel and Inverse Analysis - Forex traders need to fully embrace forex analysis using parallel and inverse pairs. They should use it daily for total market analysis or to verify their trade entries. Forex traders will realize many more pips if they fully that individual currencies drive the movement in the entire forex market every day.