Forex Trading Using Intermarket Analysis: Discovering Hidden Market Relationships That Provide Early Clues for Price Direction

by Louis B. Mendelsohn

Quick Summary

Introduces intermarket analysis as a method for forex trading, showing how hidden relationships between currencies, commodities, bonds, and stock indices provide early clues for price direction. Advocates for a shift from single-market technical analysis to synergistic multi-market analysis using quantitative methods.

Detailed Summary

Louis B. Mendelsohn, developer of VantagePoint Intermarket Analysis Software, presents his case for applying intermarket analysis to forex trading. Published by MarketPlace Books in 2006, the book argues that traditional single-market technical analysis is fundamentally limited because it ignores the interconnected nature of global financial markets.

The book opens with a thorough introduction to the forex market, explaining why it has become the world's largest marketplace (dwarfing all other markets combined), its historical evolution from the Bretton Woods fixed exchange rate system through the floating rate era, and the practical mechanics of participation for individual traders. The forex marketplace chapter details the market's unique characteristics: 24-hour trading, massive liquidity, low transaction costs, bilateral trading nature, and the role of central banks, commercial banks, hedge funds, and retail participants.

"Fundamentals and Forex" examines the traditional fundamental factors driving currency values: interest rate differentials, inflation rates, trade balances, GDP growth, political stability, and central bank intervention. Mendelsohn argues that while fundamental analysis provides the theoretical framework for understanding currency movements, it is insufficient for timing decisions because fundamental data is lagging and currency prices often move in anticipation of fundamental changes rather than in response to them.

The core of the book presents intermarket analysis as a superior framework for understanding and predicting currency movements. Mendelsohn demonstrates that currencies do not trade in isolation but are influenced by and correlated with commodity prices (particularly gold and oil), bond yields across major economies, equity indices, and other currency pairs. These intermarket relationships are dynamic -- they strengthen and weaken over time, and lead-lag relationships shift -- but they provide predictive information that single-market technical analysis cannot capture.

The "Synergistic Market Analysis" approach advocated by Mendelsohn involves quantifying these intermarket relationships using statistical techniques (including the neural network-based VantagePoint software he developed) to generate forecasts that incorporate information from related markets. The concept of "Hurricaneomic Analysis" (a service mark of Mendelsohn's) extends the weather metaphor to market forecasting: just as modern weather forecasting uses data from multiple stations and atmospheric layers to predict storms, market forecasting should use data from multiple related markets to predict price movements.

The book includes historical examples showing how intermarket relationships provided early warning of major currency moves that single-market analysis missed. Mendelsohn is transparent about his commercial interest in VantagePoint software, but the intermarket analysis concepts are valid and widely applicable regardless of the specific tools used. The core insight -- that global financial markets are increasingly interconnected and that single-market analysis ignores valuable predictive information -- is well established in academic and professional research.