How To Use Oil Prices As A Signal In Currency Exchange

By Author: Maikeisha Cuyler
Total Articles: 2
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If you have ever traded stock, then you understand the importance of buying or selling when stocks split or when the company buys back shares. It's true. Similarities between the stock and currency markets exist; but, success in currency exchange entails understanding the relationship between currency pairs.

Here, listing the most frequently exchanged pairs provides an advantaged glimpse of the currency exchange market. The pairs trade as follow: USD/GBP, USD/CAD, USD/Euro or Euro/USD. The exchange rate, or rate at which one currency trades for another, as well as the regime establish the relationships between traded currencies; in a pair one currency serves as the base and the other currency counters. It never fails.

Basically, the exchange rate describes the regime, rather fixed or floating. No currency trades under both regimes. Most currencies trade easily under a fixed- rate, however the Pound exchanges under a floating system. A fixed rate pegs trade with an import economy. A floating rate operates in an export economy.

As exchange rates fluctuate in an economy, the determinants that influence the ...
... exchange come to play. Some of the determinants of currency exchange include oil prices, economic reports, inflation, and trade balance. Specifically, in the USD/GBP exchange oil prices can carry the exchange rate in one direction or the other. Another scenario occurs as the Euro takes over as the top reserved currency. Inflation drives the Euro as the USD steps back to counter; the Euro/USD trade places the Euro as the base currency.

Still, in the exchange process currency price movements become as important in a particular trade. Currency price movements, or pips increase when a position closes correctly or when a desirable lot size becomes available.

GBP

When exchanging the Pound, remember that the currency trades to support national output. Domestic product fails. If you are measuring the pips in a trade, consider that currency price movements of the Pound occur through “confidence”. Lot sizes trade up to keep things “standard” or better. There are certain capital requirements for trading GBP.

Also, remember that GBP only counters. Accounting for about 20% of total currency exchange, GBP measures as a leading reserved currency in international markets (Bannock, 2003). The exporter succeeds.

USD

Now, as the USD steps away from the reputation as the top reserved currency, “time” specific trades carry the most weight. Pips for an USD exchange respond to time; as the currency requires some time sensitivity traders should assume that the currency wants to move in intervals. Some experienced traders make profits from momentum when a correct interval is in use.

CAD

Exchanging the CAD involves trading a pegged currency under a fixed rate as well. Similar to the USD, the CAD price movements direct the currency’s depreciation, but may not be as time sensitive. In short, a currency loses purchasing power when the currency depreciates to a value based on trade weight (Bannock, 2003). Comparing the CAD to a basket of at least 20 other currencies gives the true value of the CAD.

With the CAD/CHF exchange, you will notice that the exchange is not as popular as the other exchanges. But, in time this exchange will increase in frequency. Keep an eye on this exchange.

EURO

Leading the currency exchange market, the Euro accounts for around 40% of total currency exchanges. Traders recognize the Euro for its strong beginning before the millennium. The Euro remains the most actively traded currency. Flexibility is key. Because the Euro can trade as a base or counter, the Euro maintains its value against other currencies.

When the currency price of the Euro moves up or down, the volume of transactions carry weight. Including all positions and lot sizes, the Euro’s volume of transactions act as a guarantee to traders and governments alike. The Euro’s global appeal gives the currency an edge over other pegged currencies.

The Strategies

A price action strategy encourages traders to use national average gas prices as a signal. Traders would only have to use historical data on gas prices as a point of entry into a trade.
In brief, the national average gas price should provide a reliable entry signal for USD/GBP. Oil related exchanges continue volatility which can be profitable when a trade is executed properly.

When the national average gas price holds steady, with fluctuation less than $.25 for more than 200 days initiate a trade. On the Tuesday after the 200th day, enter a USD/GBP exchange. Make sure the lot size is at least standard.

The Energy industry may be expecting changes in the new market. You can use the news to your advantage.

Another strategy involves blue chip stocks. To demonstrate a reliable exit signal for a USD/GBP trade, the movement of pricey, blue chip stocks gives a reference point for traders. Blue chip stocks perform the duty of insuring the respective industry financial depth; you respect the stock because of its ability to close gaps in the market.

So, when wide-spread movement of blue chip stock occurs, it is expected that several other things are happening. It is important to study. Most markets including the NYSE, S&P 500, FTSE, etc feature several blue chip stocks in respect to the Energy industry.

A strong exit signal, the movement of blue chip stocks can provide a timely alert to exit when trades become too volatile. For instance, in the energy industry, the blue chip stock CAT or Caterpillar presents an example of how volatility affects exchanges.

When participating in an exchange, knowing the relationship between the currency pairs allows for confident entry and exits. The use of oil prices as a reliable signal in trade can lead to profits. Referring to stable national gas average prices and the movement of blue chip stocks will improve your trading strategy.

TIPS:
Using technical/fundamental analysis to study patterns and the behavior of the currency market provides a clearer picture of how the market moves. Understanding currency price movements and exchange rate fluctuation helps you to make wiser moves. Know your stuff.

SOURCES:
--Bannock, Graham. Dictionary of Economics, 2003. The Economist, Profile Books. New Jersey.
- Wilkes, Tommy and Sujata Rao, 2021. Why Today's Economy Can Handle Oil 100-Barrel or Higher. Reuters. https://www.reuters.com/business/energy/why-todays-economy-can-handle-oil-100-barrel-or-higher-2021-10-21/

Awarded a B.A. in Sociology and English, I graduated from FSU where I completed writing workshops and peer review. I participated with Demand Studios as a freelance writer for about 3 years and started my own finance blog, CurrencyLedger.GBP after. I enjoy reading and writing and I am glad to be a part of this platform.