Trade Forex Using Oil and Metals

Focus: FOREX

One of the biggest mistakes that forex traders make is that they tend to operate in a bit of a vacuum, writes Christopher Lewis in the DailyForex.com.

A lot of the time, this is predicated upon the allure of forex itself: When you start seeing commercials for various currency firms, strategies, and indicators, they all count how great the currency market is. So by extension, a lot of traders will simply focus on just forex, and forget the fact that there are multiple factors that can move a currency pair.

One of the most common ways to find a correlation between markets is to use metals, mainly gold, and oil to predict currency movements. It's relatively simple when you think about it, that if a producer of a particular commodity sells it to a foreign investor or corporation, they choose to be paid in their local currency. Because of this, you can use a little bit of common sense and observation to predict where a currency pair may end up over the long term.

Let's take oil as an example: One of the world’s largest oil-producing countries is Canada. Even more important, the Canadian supply the Americans with quite a bit of their oil and the Americans are the largest consumers of that commodity. Having said this, if you can imagine a large American consumer or distribution network buying Canadian oil, what must happen? It's relatively simple; the American corporation would have to exchange US dollars for Canadian dollars in order for the Canadian oil company to get paid. Obviously, this can have an effect on money flow, and send it out of the United States into Canada.

As demand rises for crude oil, as a general rule you will see the Canadian dollar gained strength.