How can you use intermarket analysis to validate your liquidation price calculation?

A technical analyst sharpen and increases his edges in the market by analyzing the intermarket behavior between asset classes. This will have to do with causation of different currency pairs. For example, EUR/USD is what you are trading, it is important to see the chart on GBP/USD as well, in order to relate that with current market condition.

Intermarket analysis is what differentiate a gambler from an investor. It matters because clients and investors can understand the different correlations across markets by identifying four areas of interest: Stocks, Currencies, Bonds and Commodities. A great book for any investor is "Intermarket analysis, profiting from global market relationships" by John Murphy.

Understand the impact of base and quote currency. Know the stronger economy of either currencies as at the time of analysis. Using USDJPY for example If USD as the base currency is having a stronger economy strength. That means USDJPY is a buy signal. And conversely, EURUSD will be a sell signal. The idea is a booming economy will influence its currency and that information can be used on different pairs in the market.

This is important to do when you combine the macro and microeconomic data with price action for a deeper insight in the market. This understanding is broadened to know the difference between correlation and causation effects in the market. How the event ongoing in a region affects other currencies and the impact on other asset classes of interest. That is not a common profitable edge a technical analysts should have.

In my experience, position size depends on the strategy that we are pursuing with a client. On a short term trading strategies, we aim at a 3:1 ratio: therefore we risk 1, to get 3x. For longer term strategies, so already on the investing side: we adjust our position size based on company fundamentals, price action, sector rotation and market seasonality. Once we outline the investment strategy, we enter the market with approx. 40-60% of the capital available. We increase, decrease or stay flat based on the indicators we looked at originally. In both cases, a trading or investment strategy managing liquidity is the key for long term success.

Knowing my liquidation price can be optimized better with intermarket analysis. If I trade 0.5 lot size with 20 pips away from entry as liquidation price on EURUSD and I see the behavior of GBPUSD to be similar with no divergence, then I can increase my market opportunity by executing GBPUSD too. That means I will reduce my lot size to 0.25 to maintain 20 pips away from entry liquidation price on both positions (EURUSD and GBPUSD).

Improvement in the intermarket analysis will boost a trading performance in the long run. By identifying correlations, causations and divergences in the intermarket analysis, performance of a trader should improve significantly and increase trader's confidence.

Intermarket analysis is among the best tool to improve trading performances. Thanks to intermarket analysis, clients understand how commodities, currencies and currencies influence the direction of their investments. To improve trading performance, I believe that the optimal way is to find a combination that works for you: understand deeply the correlation between certain factors in order to minimise risk and loss of capital (for example a combination between GBP/USD, FTSE100 and Oil price). Once the correlation that we find the most has been identified, understood and implemented: there is no reason whatsoever to change it. Keep it simple

Intermarket analysis offers insights into market dynamics, aiding in the validation of liquidation prices. Understanding relationships between asset classes is crucial for informed decision-making. For instance, when trading a stock index future, considering movements in interest rates, currencies, and commodities is essential. Discrepancies between liquidation prices and related asset prices may signal inaccuracies. Examining divergences among correlated asset classes can indicate shifts in market sentiment. Intermarket analysis not only validates liquidation prices but also identifies potential trading opportunities when asset classes move in different directions. While not foolproof, it enhances risk management strategies for traders.