Inter Market Analysis

Inter-market analysis is the analysis of four financial markets. The currency markets, the commodities market, the stock market, and the bond market. The theory behind it is that no single market is independent of what is going on in other markets. The markets are inter-related and what happens in one market has either a positive or negative effect on another market. Analysing all four markets in theory gives an investor more predictive power than an technical analysis of just one market would.

The basic principles behind this theory are that all markets are connected globally and domestically. No one market moves in isolation of another market and if an economic factor moves one market upward, the same news event will cause another market to react in either the same way or in a different way, but it will cause a reaction.

There are some quite specific rules associated with inter-market analysis. One of these is that the dollar always trends in the opposite direction to the commodities markets. Another is that a strong stock exchange has a positive correlation with the domestic currency of that stock exchange because as the demand for stocks increase so to does the demand for the domestic currency rise.

Usually traders evaluate a single market. When evaluating the forex market the technical trader doesn’t consider evaluating the other three markets. However, an intra-market trader would evaluate all the markets to see where the trends lay, where the influence of interest rates was and where the money was flowing. Some markets give a specific signal on a certain economic aspect. For example the analysis of the bond markets would give important interest rate information or the analysis of the commodities market would give valuable inflation data.

The inter-market approach is very similar to fundamental analysis and many analysts consider it as a part of intra-market analysis. The fundamental forex trader mostly examines the forex market although there are many forex traders who examine multiple markets simultaneously.

The father of intra-market analysis is John Murphy who started life as a technical trader but then began analyzing the interrelatedness of the markets. He developed an intra-market system which forecast price movements. Nowadays, intra-market systems can be embedded into many forex trading systems uses an analytical approach to studying the markets.