Learn Forex: Trading Commodity Correlations

Article Summary: Having an opinion of a commodity can help form a trading idea in the Forex market. Learn how to trade the USDCAD based off your opinion of Oil.

Do you have an opinion of the commodities market but looking to trade a Forex pair? Understanding correlations between markets can be a great way to find market direction by comparing two completely different assets. One of the most common correlations is found between USOil and the USDCAD currency pair.

Pictured belowwe can see this correlation in action through an overlay of both USOil and the USDCAD on a daily charts. What you are seeing here is known as an inverse correlation. As USOil decreases in value, it is expected that the USDCAD will move higher. The opposite is true if USOil advances, then we can reasonably expect the USDCAD to decline. Knowing this, an astute trader can successfully take their opinion of one asset to trade another. Let’s look at an example.

Learn Forex – USOil & USDCAD Correlation

Looking down at the USDCAD 2Hour chart below, we can see the pair approaching resistance near 1.0100. Normally traders will use these levels as an opportunity to plan market entries as price either breaks through or retraces through these points. Traders that already have an opinion on USOil can plan to trade the USDCAD accordingly.

The trading setup below would be indicative of a trader who is bearish on the price of USOil. By expecting prices to decline on USOil, it would be predicted that the USDCAD would break higher in line with our mentioned inverse correlation. Traders can use the 1.0100 resistance level and plan for a breakout to higher highs in an established uptrend. Entry orders can be set below this point while a stop loss can be placed under current resistance.

Learn Forex – USDCAD Breakout Setup

Remember there are always two sides to every trade. Traders expecting USOil to increase in value would expect the exact opposite. If resistance holds and price remains beneath 1.0100 traders may reasonably expect the USDCAD to turn lower.

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---Written by Walker England, Trading Instructor

To contact Walker, email wengland@DailyFX.com. Follow me on Twitter at @WEnglandFX.

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