If a currency trader does not understand forex analysis using parallel and inverse pairs, they will likely have almost no chance of being a successful forex trader. Their odds of successful trading increase dramatically if they understand it well. Forex analysis with parallel and inverse pairs can be learned in a very short period of time. This analysis method can be used two different ways, when conducting the overall market analysis using trends and time frames, and also at the point of trade entry to increase accuracy. This article will increase your understanding of these these parallel and inverse pairs concepts, as a forex trader the information is critical.
What Is Parallel and Inverse Analysis
Parallel and inverse analysis is the study of how individual currencies influence the movements of currency pairs and their intra-day movement cycles or within the context of a trend. It has also been called currency correlations and individual currency analysis. Few, if any, forex traders understand these concepts and essentially nobody is educating traders on this subject. However forex trading success would skyrocket if forex traders would master these concepts. Parallel and inverse analysis of the spot forex can be learned in about two to three weeks by any forex trader at any level.
Forex Analysis For Eight Major Currencies
Here are the eight most widely traded individual currencies in the spot forex that we will examine in this article:
The USD US Dollar, CHF Swiss Franc, EUR Euro, GBP British Pound, JPY Japanese Yen, CAD Canadian Dollar, AUD Australian Dollar, and NZD New Zealand Dollar.
Please note that an individual currency is not a currency pair, it seems very simple and fundamental but it is the crux of this entire article so we must be very clear. Remembering that a currency pair is comprised of two separate currencies will open your eyes the correct way to conduct a forex market analysis and more pips will begin coming your way
Parallel and Inverse Pair Grouping Examples
An example of a parallel group of currency pairs is as follows.
EUR/USD USD/JPY NZD/USD
EUR/JPY EUR/JPY NZD/JPY
EUR/CHF CHF/JPY NZD/CAD
EUR/GBP GBP/JPY NZD/CHF
EUR/CAD CAD/JPY AUD/NZD
EUR/NZD NZD/JPY EUR/NZD
EUR/AUD AUD/JPY GBP/NZD
In the first group of pairs on the left, the common currency is the EUR (Euro), it is the base currency. When the EUR is strengthening all of these pairs must be moving up. The second group of pairs is the JPY pairs. If the JPY is strengthening all of the JPY pairs would have to be dropping since the JPY is not the base currency, it is the cross currency on the right side of the pair. Now look at the third group of currency pairs, the NZD pairs. For the NZD to be strengthening the top 4 pairs would all have to be rising and the bottom 3 pairs would have to be falling.
How and Why Currency Pairs Move
Forex analysis by parallel and inverse pairs will explain why currency pairs move and how fast, which is vital information to forex traders. Lets look at some examples.
First example – If the EUR/USD is rising and the USD/CHF is falling, then the USD weakness is controlling and “driving” the movement of both pairs, the USD is weak. You have confirmed the movement with two pairs. We can show you how to confirm with than two pairs also.
Second example – If the EUR/USD is rising and the USD/CHF is also rising (both pairs going in the same direction) then then the USD is not controlling the movement. The EUR strength is causing the EUR/USD to move higher and the CHF weakness is causing the USD/CHF to rise. In this case the EUR is strong and the CHF is weak, so the best pair to trade would be to buy the EUR/CHF. The USD is completely out of the picture in the second example as far as what was driving the driving movement of the market. Once again you have confirmed that buying the EUR/CHF is the correct trade, and you ave verified this with two pairs. Later in this article we will show you how to confirm trades with multiple pairs.
These are two of the most basic examples. Not knowing this basic information represents the biggest failing of forex traders worldwide. Although this relationship between pairs and the real reasons for their movement being the movements of the individual currencies is simple and basic it escapes nearly every trader, although the logic is incredibly clear.
This simple, basic logic works for all 28 currency pairs derived from the eight most widely traded currencies. Simple techniques like this and conducting a forex analysis using parallel and inverse pairs will always get you into the pips and the main action of the market. Following 8 currencies and 28 pairs this way can easily generate up to 500 to 1000 pips of forex trading profits in a single week of trading, if the market is trending on a lot of pairs.
Let’s look at one more example using different pairs and currencies but the same logic as the earlier example. In this example we will use the AUD/USD and USD/CAD, two different major pairs from the examples above.
Third Example – If the AUD/USD is rising and the USD/CAD is falling, then the USD weakness is controlling and “driving” the movement of both pairs, the USD is weak.
Fourth Example- If the AUD/USD is rising and the USD/CAD is rising, then the USD is not controlling the movement and the best pair to trade would be to buy the AUD/CAD. This is the same logic as the examples above, but this time we are using different pairs and currencies. This logical way to conduct a forex analysis works on any currencies or pairs.
Once again, each currency pair has two individual currencies, by looking at currency pairs in the same groups of pairs, once currency at a time, you can quickly determine what is driving the movement. In the case if the AUD/USD and USD/CAD example they are either moving in the same direction or opposite directions, or on some trading days not at all.
Analysis Of Forex Trend Cycles
In the example below the EUR/JPY has been dropping for several days based on some simple trend indicators like exponential moving averages. You can check several EUR pairs as a group, or or check several JPY pairs as a group, over the same time period on the x-axis and quickly determine if the downward movement on the EUR/JPY over this time period was based on EUR weakness or JPY strength, or possibly both.
If the EUR/CAD, EUR/GBP, EUR/USD and EUR/CHF are all falling over the same time period then EUR weakness is driving the movement over this down cycle on the EUR/JPY. If the GBP/JPY, CAD/JPY and AUD/JPY are all falling over the same time period, then the JPY strength is the reason that the EUR/JPY dropped. This is an incredibly simple method of forex analysis, but completely ignored by almost all forex traders.
Next, the EUR/JPY stalls at support, at Point 1 on the example chart above. If it reverses back to the upside at Point 1 once again checking a few EUR and JPY pairs will quickly tell you if EUR strength or JPY weakness is driving the EUR/JPY back up off of support.
Now apply this logic to any one of 28 currency pairs comprised of the eight major currencies. Almost immediately you will start to understand why currency pairs move. You will also start to get many more pips out of your trading using the basic individual currency analysis method. This forex market logic presents itself daily to forex traders but almost no forex traders notice. The forex technical indicators and systems available now to forex traders do not take this simple logic into account and these systems are all fundamentally flawed. The parallel and inverse method of forex analysis is superior to any technical analysis methods.
Total Market Forex Analysis Using Parallel and Inverse Pairs
When we say total market analysis we are referring to the 8 currencies and 28 pairs we follow at Forexearlywarning. But these techniques wok on any group of forex pairs. Now that we know the basics about parallel and inverse analysis let’s move into some new concepts. When you analyze the forex market always analyze currency pairs as a group, by individual currency, not individually as a single pair. Currency pairs are not an island.
Always analyze all of the USD pairs together, then analyze all of the JPY pairs together, then analyze all of the CAD pairs together, etc. If traders do this every day, the trends of the market, oscillations and consolidation cycles will jump out at you right off of your charts and into your lap. If a particular group of pairs are all behaving the same way the market becomes a heck of a lot easier to trade. It is also very easy to spot choppiness or a more difficult market and you may consider not trading at all today, and with good reason.
Getting forex traders to analyze individual currencies is nearly impossible. But it is imperative to analyze pairs by individual currency carefully. Doing so will allow you to make better decisions as to when to trade, and it will make a lot more sense as to why you should stay in your trades. For example, if you buy the AUD/CAD and the AUD/JPY and AUD/USD are also trending up it’s a lot easier to make an effort to stay in the trade for a longer period of time based on overall AUD strength. This concept works for any pair or group of pairs, and that is why the method is solid.
Here is an example of how to correctly use parallel and inverse analysis to analyze the condition of a particular currency pair. For example, if a trader would like to conduct an analysis of the USD/CHF, you would first conduct an analysis of several USD pairs using multiple time frame analysis. Conduct multiple time frame analysis of the USD/CHF then repeat the analysis on the EUR/USD and GBP/USD, AUD/USD, etc. to see what the condition of the USD is. You would be looking for consistent strength or weakness, trends, oscillations, or movement cycles in the USD. Then you would isolate the CHF by conducting an analysis of the GBP/CHF, EUR/CHF, AUD/CHF, etc looking for consistent trends and movement cycles based on CHF strength or weakness.
By analyzing the USD and then the CHF separately, you have completed your analysis of the USD/CHF. This is by far the most thorough method of forex analysis, and it works and it works on any pair. Conducting a forex analysis using parallel and inverse pairs is totally logical and starts to reduce or eliminate entry risk of forex trades. You can use our handy forex market analysis spreadsheet to analyze pairs this way every day.
How Currency Pairs Are Constructed
Currency pairs consist of two items, the base currency and cross currency. Traders must separate the two then analyze each one. Most forex traders treat a currency pair like a single unit, or like it is an island in the forex market. This is a huge error and almost every forex trader does this. Traders treat a currency pair like the EUR/USD and treat it as a single thing, single object or single unit, which is a major and a massive mistake. This is not only a mistake but also a complete fallacy and a complete falsehood that leads to consistent failure.
The EUR/USD is composed of two individual currencies each with their own separate behavior, fundamentals, current condition, news releases, and reasons for moving up and down. In order to analyze the EUR/USD you must analyze the EUR currency separately and the USD currency separately. Always separate the EUR/USD into two separate currencies, the EUR and the USD, and analyze each currency separately.
The EUR and USD are two separate currencies that can both be weak, both be strong, or both be moving in opposite directions at any time in a trading session or within the context of the current market trends. This is very easy to prove by daily analysis. The minute you start to view the EUR/USD as two separate currencies and analyze each currency separately then you not only have a chance to succeed with forex trading, but pips will begin to fall in your lap with some information that is obvious and incredibly basic but completely overlooked by almost all forex traders. Now you can apply this same logic to any currency pair, it works.
Individual Currency Strength and Weakness
Almost all forex traders apply technical indicators to currency pairs, after you read this section of the article you may never do it again or you will at least wonder why you ever did it in the first place. I have literally seen forex traders take every technical indicator off their computer and charting system after realizing that what you are about to read below is true.
Back to the EUR/USD again. If you buy the EUR/USD the only way it will rise is if the EUR as an individual currency is strong or the USD as an individual currency is weak or both. The best scenario is both because the EUR/USD will appreciate the fastest under these conditions. This is also true if you buy Euros with US dollars at a currency cashier or buy the EUR/USD online with US dollars. It works the same way.
Buying the EUR/USD implies buying the left (base) currency and selling an equivalent amount of the right (quote) currency to pay for the base currency. For example, buying EUR/USD means that you are buying Euros and using US dollars to make the buy, and simultaneously selling US dollars. Technical indicators do not take individual currency strength or weakness into consideration.
There are over 150 technical indicators and over 100 candlestick chart types available to forex traders. But indicators do not drive movement on a currency pair. The only thing that drives movement on a currency pair is the currency strength or weakness of the two individual currencies that are in the pair, that’s it, that is all, nothing else. In this regard technical indicators are worthless because none of the indicators measure these quantities. Technical indicators are applied to pairs, not individual currencies, and that is the failure point.
An analogy is this, the only way a car can move is if you step on the gas pedal, this is what actually causes the car to move. Individual currency strength and weakness is the gas pedal for a currency pairs, this is what makes them move. Technical indicators do not make currency pairs move they just “indicate”. Indicators are nothing more than drawings on your computer screen. Since technical indicators are applied to currency pairs, not individual currencies, people who use them are 99% likely to fail. The failure rate of forex traders is incredibly high and now everyone can see why.
I strongly suggest that forex traders start their forex analysis with parallel and inverse analysis groups of pairs to analyze individual currencies, and individual currency pairs. Traders can also use parallel and inverse analysis of individual currencies also at the point of trade entry.
Forex Analysis of Trends
Trends can be analyzed by parallel and inverse currency pairs. An intermediate or longer term trend can be created by the day to day dynamics of the forex market. As an example let’s say that the USD/JPY is consolidating sideways then starts an intermediate to long term uptrend and continues through that trend for a few weeks or a few months.
Throughout the course of the trend the movement drivers could be the USD strength or the JPY weakness on a day to day basis because the market dynamics can change day by day. In between the movement cycles the pair consolidates or retraces. Almost no forex trader can explain what a trend really is on the forex, even people who claim to be a trend trader, however we will provide you with an accurate definition of a trend here.
A trend on a currency pair is nothing more than a long series of continuous movements both sides (currencies) of the pair that favors movement in one direction. In order for the USD/JPY to build a trend that lasts for several weeks either the USD must be weak or the JPY must be strong or both throughout most of the periodthe trend exists. Simple.
If you analyze the charts of several USD pairs and several JPY pairs during the period of time when the USD/JPY is trending at least one of those groups will be trending in the same direction. Parallel and inverse analysis wins again with obvious, simple and logical analysis. It wins every time because it is the logic behind the spot forex. Learn parallel and inverse analysis and you will learn to clearly identify and capture pips from forex trends.
This picture is a continuation of the previous image. The EUR/JPY stalls at support at point 1 then forms a new uptrend off of support. The black line represents the movement cycles and consolidation cycles on a conventional price chart like a bar chart, simplified with a black line. Each individual up cycle within the trend is either EUR strength or JPY weakness or both. Nothing else. It’s that simple.
WHAT IS A FOREX TREND >> Remember that a trend on a currency pair is a long series of movements and market dynamics on both sides of the pair that favors movement in one direction. In this case each upward movement off of support is EUR strength or JPY weakness. This same concept of forex analysis works on all 28 pairs we follow, or any other currency pair for that matter.
Analysis of Ranging and Choppy Markets
We just finished discussing what a trend is and what drives a trending market, currency pair or group of pairs, now let’s discuss a totally different type of market condition, a ranging or choppy forex market. Once again forex analysis using parallel and inverse analysis pairs comes to the rescue. You now know what a trend is and why currency pairs move. Sometimes in a choppy market currency pairs are not moving and the market becomes choppy.
Generally speaking a ranging market can take on two forms. Currency pairs ranging up and down in large oscillations that are smooth cycles, easy to spot and trade. The other form is a tight ranging choppy market that are so difficult to trade that it is best to trade for less lots or not trade at all. In a tight ranging market the market drivers, or currency pairs pushing movement, changes almost daily.
One day the AUD is strong the next day the CAD is weak and the next day the USD is strong, etc., and it just continues for days and days. In a trending market the market dynamics change far less frequently. In a choppy market the individual currencies driving the movement change much more frequently, almost day to day. Or else the same group of pairs moves in different directions on consecutive days, for example the USD is strong one day and weak the next. Each currency pair has two separate currencies, so either currency in the pair can be driving the movement. If you can identify what parallel and/or inverse group is driving the market you can successfully trade every day, but in a choppy market the trades will be short term or intra-day trades.
Traders should be able spot a difficult to trade, choppy market rapidly using parallel and inverse pairs. If you conduct a multiple time frame analysis on the USD/CHF and the chart looks choppy, or it has tight trading ranges down to the H1 and M30 time frames, immediately go to the other USD pairs and CHF pairs to confirm. If all of the USD pairs look the same or all of the CHF pairs look the same you have confirmed that that pair or group is choppy. You may still be able to trade another pair then check the USD/CHF again tomorrow. Remember that currency pairs move because one currency is strong and the other is weak. In a choppy market both currencies might be strong or weak, creating the “tug of war” that leads to choppiness.
Conversely, identifying a trending market will become much easier as well by checking the parallel and inverse pairs. If the USD/CHF looks like it’s in an uptrend a quick check of the USD and CHF pairs will confirm the trend. Your trading confidence will skyrocket. This is why all forex traders should review the condition of as many currency pairs as possible in your day to day market analysis routine in the same parallel or inverse currency groups that you are interested in trading. Using multiple time frame analysis and drilling down the time frames will unveil what is going on with the pairs you are interested in trading. Combining the multiple time frame analysis with parallel and inverse pairs becomes very powerful. You may not even trade some of the pairs you analyze but you will always know what is going on in the market. Identifying a choppy or trending market becomes much easier, and after some practice, second nature.
Parallel and Inverse Analysis For Trade Entries
Forex analysis with parallel and inverse pairs can be use to analyze charts and trends, but it can also be used to analyze and verify potential trade entries. The number one question forex traders have is “When do I enter the trade??”, quite naturally. Once again parallel and inverse analysis will solve this problem. After you analyze the forex market trends and you write up your trading plan, you can then set your audible price alarms at critical areas of support and resistance across some key pairs.
When the alarms go off in the main trading session, or after significant forex news, parallel and inverse analysis can be used for accurate trade entry management. Forex traders need to know when to get in, when to stay out, and when to look at another pair. They need an entry management tool that verifies the trade entry.
This image is for a real time visual map of the spot forex is called The Forex Heatmap®, and it give traders a live forex analysis of which individual currencies are strong and weak. The heatmap utilizes parallel and inverse analysis to tell a trader what pair to enter and in what direction across 28 pairs and the eight major currencies. The basis of the heatmap is parallel and inverse analysis and individual currency strength and weakness. In this example above the CAD is weak, and using parallel and inverse analysis you would possibly sell the CAD/CHF or buy the USD/CAD.
Throughout the trading week sometimes you can get a “slingshot effect” when a currency pair has a dual driver, one individual currency is strong and the other is weak. Here is an example of a slingshot: If the EUR is strong across the board (all EUR pairs are green on the heatmap) and the USD is weak across the board, then the EUR/USD will “slingshot” and move higher at a much faster rate. A pair with the volatility level on like the EUR/USD will move at least 150 pips under these conditions, in one trading session. Some of the more volatile GBP pairs can move 300 pips in one trading session. After trading with tools like the heatmap and using parallel and inverse analysis, trading the forex market with technical indicators becomes completely obsolete.
Final Thoughts – The vast majority of forex traders, almost all of them, don’t even know what parallel and inverse analysis is, much less understand it or use it daily in their forex market analysis or to verify their trade entries. This lack of knowledge eventually kills their demo accounts. Forex traders will never realize the real profits of the market until they become experts at parallel and inverse analysis, which drives the movement in the entire market every day. Thorough knowledge of parallel and inverse analysis and daily forex analysis using this technique will permanently change the way you think about the forex and give traders solid a rationale as to why currency pairs move.