The Advantage of Intermarket Analysis

Intermarket analysis is a type of analysis that many traders use to gain perspective on the stock market. This type of analysis involves looking at multiple markets in order to get an idea of what is new in a market. Intermarket analysis is commonly used by many traders and has some merit. Here are a few things to consider about the advantages of intermarket analysis.

Looking at a Single Market

Single market analysis is the opposite of intermarket analysis. With single market analysis, a trader looks only at the market that they are currently involved with. This is what many stock traders do everyday. Instead of looking at bonds, currencies, or any other market, they remain focused on the stock market. Some people like to use this method because it is simpler and it allows them to stay on task.

Intermarket Analysis

Intermarket analysis is the analysis of several financial markets at once. By looking at these multiple markets, a trader can attempt to get some type of idea how the markets are related. Traders can often gain important information from looking at other financial markets. Then, they apply this knowledge to the market that they are invested in.

Correlation

The idea behind intermarket analysis is to try to find correlations between financial markets. Even though financial markets tend to move independently of each other, certain aspects of financial markets correlate with one another. If a trader can identify these correlations, they can often predict what will happen in a particular financial market with some level of accuracy. For example, when one market goes down, another financial market might soon follow. Without looking at the first market, a trader would have no idea what is about to happen in the second financial market. 

Different Markets

When utilizing intermarket analysis, an individual should look at several different financial markets. Many financial experts have spoken of the value of diversifying a portfolio with different types of asset classes. By paying attention to these various markets, you can increase the odds of your success as an investor. For example, you should pay attention to the stock market, the bond market, the commodities market and the Forex market. All of these markets are intertwined and they affect each other in one way or another. 

Foreign Markets

In addition to looking at different markets within your own country, you should also research foreign markets. In many cases, foreign markets will have a drastic impact on what happens in your own domestic markets. 

Even though intermarket analysis can be very beneficial, you do not want to over-analyze anything. If you get too involved with analyzing everything that happens in every financial market, you will not have any time to actually invest. You might decrease your effectiveness overall as an investor. Try to pay attention to what goes on another financial markets, but you need to save some time to focus on your main markets as well.

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