-
Organization
- CommuniTrade
- Dispute Resolution
- UnityGains
-
Resources
The forex market and the equity market (also known as the “Stock Market”) are two major financial markets, but each operates differently from one another. However, did you know that you can use the equity market to feel the pulse of the forex market?
In this lesson, I’ll let you in to a little forex trading hack, monitoring the equity market to make informed forex trading decisions.
When you trade forex, one skill you need to master is evaluating the economic outlook of a country. With this, you have a solid reference on how the market is likely to move.
Some traders look at the fundamentals like the economic factors like GBP, employment rates, and inflation data. Some also look at the geopolitical events and news releases.
However, there are wise traders who look at the equity or stock market. How?
Assume you’re long on USD/JPY. This means that you’re buying a USD and selling a JPY.
If the US stock market has a strong outlook, while the stock market in Japan is performing badly, then you can expect your position to bag those sweet returns.
The market stocks evaluate and assess the performance of a specific economy. It represents a standardized weight that tracks the performance of a group of securities within the market.
How does it work as a benchmark?
You use market indices as reference points to assess the relative performance of an economy relative to others. By comparing the returns of a portfolio or fund to relevant indices, you gauge how well one economy is performing compared to the broader market.
Remember, a strong stock market equates to a strong currency value. On the other hand, a weak stock market is likely to result in a weak currency.
Want to use the market equities to gauge the forex market performance? Here are the globally known stock indices that are known to provide accurate representation of their respective countries’ economic health.
The Dow Jones Industrial Average, or simply the Dows, is the founding stock market index in the financial market. This was established in 1884 and is considered the oldest stock index.
With its long history, this stock index is widely regarded as a barometer of the U.S. stock market's performance.
The Dows comprise 30 large, publicly traded companies across various US sectors. This stock index uses the price-weighted index to calculate the performance of the market.
The S&P 500 (or the "Standard & Poor's 500") has been in the financial market since 1957. It's the most popular market index because it accurately represents the US stock market's performance.
With this factor, the S&P 500 is widely used by investors, fund managers, and analysts as their financial benchmark.
This index is market-capitalization-weighted; it factors all 500 publicly traded companies in the United States. It multiplies the company's stock price by its total number of outstanding shares.
The NASDAQ Composite was published by the Nasdaq OMX in 1971. It's popular in the technology sector as it gauges the performance and growth of sectorial stocks.
This market index includes more than 2,500 stocks listed on the Nasdaq stock exchange. Essentially, it covers a wide range of industries, including technology, biotechnology, and telecommunication sectors.
For stock index calculation, the NASDAQ Composite is a market-capitalization-weighted index. It reflects the performance and market value of all stocks listed on the Nasdaq exchange.
The FTSE 100 (or "Financial Times Stock Exchange") was established in 1984 under FTSE Russell. This market index serves as a benchmark to assess the performance of the UK stock market.
Why? Because it comprises the 100 largest companies on the London Stock Exchange. With this, investors and fund managers view this stock index as a sound representation of the UK's stock performance.
FTSE is also a market-capitalization-weighted index. It's calculated based on the total market value of constituent companies' shares.
The Nikkei 225 was published by the Nikkei Incorporation in 1950. It's popular among investors and fund managers because it serves as a benchmark in assessing the performance of the Japanese stock market and its overall economic health.
This stock index represents a wide range of Japanese sectors, including the leading sectors like technology, finance, manufacturing, and services. It encompasses 225 large, liquid companies listed on the Tokyo Stock Exchange.
Unlike some benchmark indices that rely on market capitalization for weighting, the Nikkei 225 factors stock prices to analyze a unique index movement. Using the price-weighted index, Nikkei 225 is calculated by getting the sum of all its constituent companies and dividing it by the divisor.