Making Forex Trading Decisions Based on Stock Index ETFs

An exchange traded fund (ETF) is similar in nature to a mutual fund because it is a collection of different stocks, but the particular exchange traded fund that can be used as a predictive barometer for the American economy is called the S&P Depository Receipts index which has the stock symbol STY. The reason it is important to understand this ETF and what it does is because this particular fund covers the entire S&P stock market which has some of the largest companies in the world. Whatever the depository receipts index does, it is likely that the US dollar will follow in suit, which can be a great tool for forex traders.

This strategy is a market analysis method called intermarket analysis because you are watching the stock market to predict where the US dollar will be headed in the future, and then using this information to trade the dollar against other currencies. The reason the STY ETF index and the value of the dollar against other major currencies are aligned so closely is because the STY is literally a synthesis of the complete market analysis of Wall Street for every company on the S&P, which is a very significant chunk of the American economy. In New York there are tens of thousands of stock traders performing market analysis and coming to buy or sell decisions from a range of corporate and economic financial data, and all of their decision making is filtered into the market as a whole, which is then filtered into an index-based exchange traded fund of which of company is an equal part.

So indeed, the S&P depository receipts index is a forex trader's best friend, because it plays the role of demonstrating where the value of the dollar will be headed in the near future as well as giving a very strong fundamental economic signal as to whether the dollar is going up or going down. If you have a definitive confimation that the value of the dollar will increase over the next weeks or months, you can trade the four major USD-based currency pairs and reap the rewards of this gain across four major positions.

As a test for you to prove to yourself that the S&P depository receipts index is an accurate generator of trading signals, print out a weekly chart of the SPY and then print out a weekly chart of one or two currency pairs that have USD as the base currency, such as USD/JPY or USD/CHF. You should see that there is a close relationship between the price levels of the currency pairs and the price level of the SPY, and the SPY should be removed from the currency pair chart by anywhere from 3 days to 2 months or more, meaning that whatever levels the SPY trades at then the value of the USD is likely to follow in suit. This type of intermarket analysis should not be used as a stand alone trading strategy, but instead it should be used as a confirmation of the direction of a trend and of which direction you should be placing your trades, whether you should be long or short the US dollar.