Forex Market’s Domino Effect
Putting it plainly, this is a domino effect whereby a shift in one factor causes a cascade of identical shifts in factors that follow in a straight line. Let’s visualize this idea applied to the Forex market. It’s common knowledge that the movements of different currency pairs are highly correlated. Visit multibank group
If we take a set of currency pairings and observe their behavior, we find that one or two of them will start to move at some time, while the others will remain motionless at first before eventually beginning to follow the former. To use a domino analogy, these top two pairs are the “first tile to fall” that sets off a domino effect. Even while it’s possible to get the conclusion that there are leading and lagging pairs in the Forex market, the roles of these pairs are always shifting.
Without seeing this consistency on the charts, it’s difficult for most novice traders to make sense of the domino effect. Every week, the market undergoes a chain reaction, and the most astute traders can profit from this phenomenon. While the domino effect is not something we suggest you utilize as your primary approach, knowing about it is another accomplishment on the road to being a skilled trader.
When talking about the domino effect, you’ve probably all wondered why certain pairs don’t always move together, despite the adage that “Price takes all into consideration.”
Causes and Consequences of a Domino Effect
Indeed, the efficient market hypothesis states that all material information is fully and instantly reflected in market prices. Because its daily trading volume much outstrips that of the NYSE exchange by more than 90 days, the foreign exchange market (Forex) reacts first.
But the domino effect occurs because each currency pair has its own unique characteristics, such as its own support and resistance levels, news schedule, and much more.
A domino effect can be seen when news about one currency pair breaks a major level at night, and other correlated pairs follow suit the next day after statements about the US dollar. Put another way, the market will always attempt to restore equilibrium if there is a discrepancy in the relative velocity of different pair-wise exchanges.
While both the domino effect and arbitrage techniques rely on analyzing data, the later requires the application of precise calculations while the former relies primarily on visual analysis of graphs.
What are the Conditions That Lead to the Domino Effect Taking Place?
The forex market is a very large market that operates very efficiently, which is why the domino effect happens. It is the most efficient and competitive market in the entire planet. On the spot FX market, more transactions take place in a single day than take place on the entire New York Stock Exchange in three months. Nobody is in the dark about any global economic news, political or economic statements, price levels, or market movements; there is nothing to hide, and retail and institutional traders alike already have all the relevant information factored into their pricing.
Due to the size and competitive nature of the market, daily inefficiencies in the foreign exchange (Forex) sector are bound to be resolved at some time in the future. If you can identify the falling of the first domino, then you will be able to predict the movements of the other currency pairs. It’s possible for one currency to start appreciating or depreciating, and then for that trend to start spreading to other pairs of currencies that use the same common currency.
Examples of the Domino Effect
If you are not entirely clear on the concept of the domino effect at this point, allow me to walk you through some instances so that you have a comprehensive understanding of the topic. Ninety-nine percent of forex traders are only able to focus on one or two currency pairs using unreliable forex technical analysis and indicators. Even though the charts are right there in front of them on their computer screen, they will never see the entire forex market as a series of dominoes.
They are unable to perceive the bigger picture for the simple reason that they either do not look, do not want to look, or have the wrong indicator configuration, which does not take into consideration individual currency moves, consolidations, or support levels, among other things. They, along with every other dealer, have clear access to the information at their disposal. Therefore, traders need to install our free forex trend indicators on a currency-by-currency basis and begin monitoring the market daily using a variety of time frames. Only then will the dominoes be visible in their proper order.
Example 1 of the Domino Effect
The current issue is that every JPY pair is moving back and forth within extremely wide ranges over a period of five-day cycles. These pairs have completed a downward cycle and have reached a support level where they are currently stuck. You anticipate that they will start to fluctuate back towards the upside, but you are waiting for some confirmation from the market before acting on this anticipation.
After the news affecting the AUD and NZD is released during the Asian session, the AUD/JPY and NZD/JPY currency pairs begin to show an upward trend initially. The GBP/JPY, EUR/JPY, and CHF/JPY pairs will follow later in the European session, while the CAD/JPY and USD/JPY pairs will follow to the upside in the US session after the CAD news.
The weakening in the Japanese yen starts during the Asian session, then it spreads to the rest of the Japanese yen pairs during the main session, and eventually all the dominoes fall. It’s possible that the USD/JPY will rise the following day in some instances, but in the long run, the value of all JPY pairs will increase up.
The fact that traders are observing new movements beginning on the JPY pairs and the possibility that they will be able to ride the up cycles for a period of five days makes this an incredibly interesting example. To supplement this conversation, we have a separate course that focuses solely on range forex pairs, in which traders can view many examples and illustrations.
This is a basic and clear illustration of how the domino effect works, but it demonstrates how it is now possible to predict moves on pairs by constantly keeping an eye on the bigger picture. First, the price of all the exotic JPY pairs goes up, and then the USD/JPY catches up to them and follows them up. A trader who focuses just on one currency pair or who uses incorrectly calibrated trend indicators will never notice this phenomenon.
Example 2 Impact of One Currency’s Strength or Weakness on Others
We can easily identify the trailing currency pairs if we group all the pairs together with a common currency. Consider the accompanying illustration of many yen pairings, each of which has experienced a decline in its own session. That’s how we know the strong yen is behind this change. The intriguing part, though, is that a key pair (USD/JPY) has not only held its footing but gained a fraction of a percent. The following trading day, however, the disparity was remedied, with all yen pairs continuing their downward trend and USD/JPY falling by a factor of 2.
Example 3 Larger-Scale Pair Correlations
Currency pairs to keep in mind include euro/dollar, pound/dollar, Swiss franc/dollar, Australian dollar/dollar, New Zealand dollar/dollar, yen/dollar, and Canadian dollar/dollar. There is a high degree of correlation between these pairs because the US dollar is the connecting currency.If you look at all 7 pairings together, you’ll notice that one of them quickly rises to the top and drags the others along with it. Finding the trailing pair early and capitalizing on it is crucial in this scenario.
