Best Intermarket Trading Strategies

19 Best Intermarket Strategies 2024: Cross-asset Analysis

The potential of intermarket trading strategies is huge, and you get a glimpse of what you can do with our distilled Intermarket Trading Strategies guide. This resource is made for traders aimed at learning insights across equities, bonds, commodities, and currencies to find trading strategies or refine their old ones. Simple and actionable strategies that fit into every trading style – whether it’s for quick day trades or long-term bets.

Table of contents:

Key Takeaways

  • Intermarket trading strategies are versatile tools for traders to capitalize on the relationships between different asset classes such as stocks, bonds, commodities, and currencies, providing opportunities to diversify portfolios and manage risks.
  • While intermarket trading can offer increased profit potential, it comes with inherent risks including market volatility, the complexity of trades, and operational risks; requiring traders to be informed and employ appropriate risk management strategies.
  • Technological advancements such as automated trading systems and machine learning are significant in intermarket trading, enabling rapid data analysis and execution, but they raise ethical considerations and the need for balance between the technology and human oversight.
  • We show you an example of an intermarket trading strategy.

Intermarket Trading Strategies

19 Best Intermarket Trading Strategies
19 Best Intermarket Trading Strategies

Before we start explaining the different trading styles, we provide you an example of an intermarket trading strategy:

Intermarket trading strategy – trading rules, backtest, returns, and performance

The price action between assets can be used as input into trading strategies. For example, higher interest rates are not good for stocks because they get less attractive to invest in. Can we develop a strategy based on this assumption?

Let’s try. We make the following trading rules:

  • When the ten-year Treasury rate crosses below its 25-day moving average, we buy the S&P 500.
  • When the ten-year Treasury rate crosses above its 25-day moving average, we sell the S&P 500.

This is a very simple strategy, but it turns out to be very effective. This is what the equity curve looks like from 1960 until today:

Intermarket analysis trading strategy
Intermarket analysis trading strategy

This simple trading strategy has performed just as well as buy-and-hold despite being invested only 50% of the time, resulting in significantly lower drawdowns.

This serves only as an example – we have better intermarket analysis trading strategies in our shop.

1. Equity-Bond Spread Trading

Equity-bond spread trading exploits the interplay between stocks and bonds, a relationship where dominance can change from one asset to another, as indicated in the trading strategy example above.

This method empowers traders to leverage the interactions of this duo, aiming for gains regardless of which way the market goes. By strategically buying and selling correlated assets, traders are able to capitalize on changes in their relative prices—this strategy is adaptable across various investment durations, ranging from rapid day trading executions to longer-term strategies geared towards portfolio growth.

Equity-Bond Spread Trading concept PDF

2. Currency Carry Trades

The international foreign exchange market is an expansive environment, with currency carry trades serving as a strategic tool for exploiting differences in interest rates.

By borrowing money in currencies that have low-interest rates and investing those funds into higher-yielding currencies, traders aim to profit from the variance between these rates.

This technique transforms the cost of borrowing into profits, enhancing a financial institution’s net interest margin. When effectively hedged, this method can provide stable cash flows even amidst the volatility caused by fluctuations in foreign interest rates and exchange rate movements.

3. Commodity-Linked Currency Trading

The prices of commodities and the currencies from their producing nations often exhibit a closely connected relationship, moving together in unison. For example, the price of commodities is linked to the AUDUSD rate. Another example is the price of oil an the Norwegian krona (NOK).

This alignment provides an opportunity for traders to capitalize on, especially when the economic well-being of a nation is heavily reliant on one resource. For example, as gold’s value increases in the market, so too does the Australian dollar tend to strengthen, reflecting these commodity price movements.

Yet trading currency linked with commodities isn’t without its obstacles. Traders are faced with challenges including liquidity issues while ensuring that such correlations aren’t merely temporary phenomena but rather consistent patterns worthy of investment attention.

4. Yield Curve Flattening/Steepening Trades

The yield curve serves as a barometer of economic mood, and its fluid character lays the foundation for devising trading strategies. Trades that capitalize on the flattening of the yield curve consist of an intricate mix of short-selling combined with purchasing long-dated securities—a sophisticated practice based on conjecture about shrinking gaps between interest rates.

A few years back, we tested the intermarket relationship between inverted yield curves and stock market performance.

On the flip side, trades betting on a steepening yield curve are predicated on increasing rate differentials—an approach demanding strong risk appetite and a firm belief in escalating interest rates.

5. Gold vs. US Dollar

Gold vs. US Dollar correlation

The revered inverse correlation between gold and the US dollar typically reflects worldwide economic moods, a frequent tactic in traders’ strategic toolkits. As the strength of the dollar wanes, gold usually regains its shine and when it is strong, gold’s appeal diminishes. This dynamic enables traders to safeguard their investments from inflationary pressures – if you get it right.

To measure how strong this connection is, one can observe correlation coefficients. High values denote a solid link. Shrewd traders also pay attention to subtler correlations that may involve assets like the South African Rand or currency pairs such as USD/CHF to enhance their trading insights.

6. Volatility Spread Trading

Volatility spread trading is mostly done in the option markets. Trading strategies such as shorting calls or utilizing iron condors that focus on volatility spread allow market participants to steer through choppy waters by capitalizing on varying levels of volatility across different instruments.

These methods are grounded in the principle that within option pricing, volatility stands out as an elusive element open to speculation and tactical use. Volatility and time are the two most important factors in determining the options premium.

However, volatility spread trading is mainly for professional and institutions, not retail traders.

7. Oil vs. Equity Indices

Oil vs. Equity Indices trading strategies

Crude oil fluctuations impact stock market indexes, often reflecting broader economic shifts. Various trading strategies have been developed to exploit this connection, focusing on crude oil.

These range from short-term swing trading to longer-term approaches designed to guide the turbulence within the energy sector. Traders venture into forex markets by correlating their trades with the reserve currencies of countries rich in oil reserves, thereby indirectly engaging with this precious commodity. An example is Norway and Canada (NOK and CAD).

The Hamilton method is a strategic tool for investors dabbling with supply and demand patterns in the oil marketplace. This technique links crude oil prices to an array of economic metrics, providing direction for those active in these trade maneuvers.

8. Commodity vs. Equity Indices

Commodity vs. Equity Indices correlation

The complex relationship between commodity prices and stock market indices is subject to rapid changes, influenced by economic cycles and global demand. Those who trade these assets need to understand that correlations vary in strength and nature, presenting both chances for gain as well as the potential for extended discrepancies.

An indicator frequently used is the commodities-to-equity ratio, which we backtested.

With commodities becoming more intertwined with financial markets, this synchronized movement has shifted conventional relationships and diminished the advantages previously gained from diversification.

9. Interest Rate Differentials

A substantial disparity in interest rates across different nations creates a favorable environment for techniques such as the carry trade strategy. Investors leverage these rate differences to turn a profit. Not only can traders gain from the actual trading position, but they also benefit from accumulated interest throughout the time frame of their investment.

The foundational element that determines whether or not a carry trade might be successful is the Net Interest Rate Differential (NIRD). It grounds assessments of potential trades within the economic contexts of the respective countries involved.

That said, the carry trade has forced many funds to “blow up”.

10. Cross-Asset Correlation Trades

Cross-Asset Correlation Trades concept PDF

Trades based on cross-asset correlation are complex interactions between various asset classes and present opportunities for traders to capitalize when these patterns skew.

By evaluating how diversified assets within a portfolio are, this measure of cross-correlation serves not just as a tool for mitigating the potential for significant losses, but also as an indicator that can shed light on cycles which could provide insights into future returns.

11. Emerging Markets vs. Developed Markets

The significant disparity between developed and emerging markets offers numerous opportunities for diverse trading strategies. Emerging markets are characterized by a vast array of consumer preferences, behaviors, and market dynamics that are different than those in developed markets. This offer potential diversification benefits.

The promise of economic growth is greater in these vibrant economies with their rapidly expanding middle classes and higher GDP growth rates, particularly when contrasted with the saturated maturity of developed markets.

12. Interest Rate vs. Equity Dividend Yields

Interest rates and dividend yields from equities might compete with each other, where increasing interest rates may pull at stock valuations, as indicated in our backtest further up in the article.

To keep their appeal to investors, corporations might need to raise dividends. This push-and-pull can shape trading strategies as stocks could fall with rising rates. Sectors such as financials might see advantages from increased rates.

To mitigate risk exposure, investors could look towards shorter-duration bonds or consider betting against the stock market by short selling.

13. Intermarket Pairs Trading

Intermarket pairs trading is based on the existence of a correlation coefficient equal to or exceeding 0.60 (the higher, the better).

14. Commodity Spread Trades

Arbitrageurs in the market, known as commodity spread traders, capitalize on the differences in pricing between raw materials and their end products. They execute this by selling futures of the unprocessed commodity while simultaneously purchasing futures of its final good, thus attempting to gain from contango or backwardation—terms that reflect underlying supply and demand conditions.

Depending on whether it is a bullish or bearish spread being employed, these trading strategies mirror what is currently perceived about demand within the marketplace.

15. Technical Intermarket Analysis

Technical Intermarket Analysis involves understanding the relationships between different asset classes to predict market trends, integrating technical and fundamental analysis techniques. John Murphy was one of the first to cover this technique when he published Intermarket Technical Analysis in the 1980s. Since then, quants have used the same principles.

Tools such as correlation allow investors to use intermarkets to speculate and mitigate risks.

16. Intermarket Arbitrage

Traders engaged in intermarket arbitrage meticulously examine market discrepancies in the search to for profit. This approach frequently depends on complex algorithms that quickly identify and exploit pricing differences across various regions or financial markets.

17. Risk-on vs. Risk-off Trades

Market sentiment swings frequently, moving capital from high-risk opportunities toward more secure options. Savvy traders who excel at interpreting these financial currents adjust their strategies by gravitating towards assets such as bonds or gold when risks rise and to risk assets like stocks (even crypto) in times of economic optimism.

18. Market Breadth Intermarket Analysis

Market breadth indicators are like a health check for the stock market, measuring the strength of advancing stocks versus those that are declining.

When market breadth surges, it implies that bullish forces have taken hold, possibly reinforcing an uptrend. Conversely, when falling stocks outnumber rising ones, this may be bearish and signal a possible downturn.

19. Sector Rotation

Some traders and investors employ sector rotation as a tactical approach, shifting capital among various assets. For example, depending on momentum, capital might be allocated from stocks to bonds based on a monthly ranking system.

An example is a ranking system based on SPY, TLT, EFA, and GLD when investing in the best-performing ETF based on the performance of the previous N months.

What is intermarket trading?

Intermarket trading is buying and selling securities, such as stocks, bonds, commodities, or currencies, across different markets. These markets can be located in different countries or regions or involve different asset classes within the same country or region.

Intermarket trading allows investors to capitalize on price discrepancies or arbitrage opportunities that may arise between related markets. It also enables diversification of investment portfolios across different asset classes or geographical regions, which can help manage risk.

What are Intermarket Trading Strategies?

Intermarket trading strategies are focused on intermarket relationships, which can be used as signals for when to buy an sell different assets. Such strategies explore connections among currency values, various commodities, and stock indexes, presenting a comprehensive perspective useful for predicting market trends and minimizing investment risks.

Why is intermarket trading important?

Intermarket trading is important because all assets and markets are, in many ways, connected. Moreover, it’s important because you can mitigate risk, find profitable trading opportunities, and hedge. Put short, you can allocate your capital efficiently.

Intermarket Trading Strategies

How do you build Robust Intermarket Trading Systems?

You build robust intermarket trading systems by doing the following:

  • Extracting predictive principles based on the interactions among bonds, stocks, and commodities.
  • Employing strategies such as intermarket divergence.
  • Producing trustworthy signals.

You do all this by backtesting.

Can intermarket trading predict market movements?

Intermarket trading can predict market movements, but you must backtest the trading rules on historical data. Its predictive power comes from its capacity to uncover subtle links among markets. Constructing intermarket trading systems yields several advantages, which render them suitable for traders looking to gain an advantage.

How do you select the right software and tools?

You select the right software and tools by taking the time to compare tools and software to your needs. Software for backtesting comes in automated as well as manual varieties.

These tools—often made available at no cost by various trading platforms—offer access to past market information.

What is meant by intermarket analysis?

Intermarket analysis examines the interconnectedness within the financial landscape by assessing how different asset classes interact with one another. Introduced by John Murphy, it aids in identifying market trends and improving investment choices through an integrated examination of stocks, bonds, commodities, and currencies (for example).

This method merges aspects of technical, fundamental, and quant analysis to serve as an instrument for forecasting market dynamics and validating trading theories.

What tools are used in intermarket trading?

Tools used in intermarket trading include correlation studies and custom-made quantitative models. These sophisticated tools are designed to scrutinize and capitalize on the connections between different asset classes by examining market data for correlations and using economic indicators as a basis for making trades.

These essential devices are critical in forecasting stock price fluctuations by considering market shifts that show a correlation—such as bonds, currencies, and commodities.

How do traders use intermarket analysis to inform their trades?

Traders use intermarket analysis to inform their trades by examining the relationships between different asset classes, such as correlation. This approach to market evaluation provides trading perspectives and might assist in identifying possible trading strategies or asset allocations. Most of the strategies are rule based

When analyzing how interest rates typically move inversely to stock prices, for instance, traders can make strategies based on this relationship.

How to analyze Historical Data and Market Correlations?

Traders analyze historical data and market correlations by looking at the past and what has happened before. They meticulously analyze previous market performance, searching for definitive signals for when to enter or exit a trade, assessing both gross and net profits after factoring in the costs associated with trading.

What is the relationship between bonds and commodities?

The relationship between bonds and commodities is, most of the time, inversely correlated. When rates are low, commodities might increase due to inflation and vice versa.

However, the interplay between commodity prices and bond values is intricate, influenced heavily by the ebbs and flows of inflation and interest rate changes. When commodities experience a surge in price, leading to increased inflationary pressure, it’s common for bond prices to move inversely downward as interest rates climb.

How to start with intermarket trading?

You start with intermarket trading by backtesting and studying to grasp the relationships among different asset categories, which includes charting how stocks, bonds, currencies, and commodities fluctuate in relation to one another.

Traders should equip themselves with tools such as correlation analyses, spreadsheets, and graphical representations to scrutinize varying market data sets. Their aim is to secure a substantial correlation coefficient that supports their speculative theories.

What are some real-world applications?

An example of real-world applications is the inverse relationship between stocks and bonds. Another example is the inverse relationship between the value of gold and the US dollar.

Whether engaging in day trading or making long-term investments, intermarket strategies have proven flexible and effective under different types of trading conditions.

Can you do intermarket strategies to different time frames?

Yes, you can do intermarket strategies in different time frames. However, we believe they are best suited for very short or weekly analyses.

Intermarket strategies offer adaptability, fitting for day trading as well as the extended range of long-term investment. Day traders in particular need to be alert to short-term links that can change rapidly.

Conversely, those with a focus on long-term investments might base their approaches on more solid intermarket connections like the consistent inverse correlation between commodity prices and the U.S. dollar.

What risks are associated with intermarket trading?

The risks associated with intermarket trading are mainly due to correlation breakdowns and adverse spread movements impacting positions, which can result in financial losses that may occur even with reduced margin requirements.

How to avoid common pitfalls when trading intermarket strategies?

The best way to avoid common pitfalls when trading intermarket strategies is to exercise discipline and robust risk management practices and always have a margin of safety. Trading is about facing an unknown future; the biggest loss is yet to come.

Two frequent errors—trading based on emotions or altering objectives to sidestep acknowledging a loss—can be counteracted by staying impartial and sticking firmly to a thoughtfully developed trading plan.

Consistently reviewing performance and considering the impact of transaction fees also serve as essential safeguards against typical challenges encountered in intermarket trading.

How to interpret intermarket relationships?

Interpreting intermarket relationships requires a keen awareness of the dynamic connections and effects shared between various asset classes, including:

  • currencies
  • bonds
  • commodities
  • stocks

By analyzing these interactions, traders can obtain a more comprehensive view of trading strategies.

A classic intermarket relationships is between bond prices and stock values.

What are the challenges in intermarket trading?

The challenges in intermarket trading are as follow:

  • Unpredictability stemming from the ripple effects across various markets
  • Correlation breakdowns
  • Black Swan effects
  • The potential operational hazards due to system breakdowns or procedural mishaps that could lead to expensive mistakes in trading.

The constantly shifting relationships between markets compound the complexities involved

What role does machine learning play in intermarket trading analysis?

Machine learning is becoming increasingly important in intermarket trading analysis because it can pore over historical data to find trends and predict future shifts in market conditions. These advanced AI-powered algorithms grant traders the advantage of performing automated transactions.

What is the correlation in intermarket trading?

Correlation in intermarket trading is a statistical metric that represents the degree to which different asset classes move in tandem, indicating their level of synchronicity. Investors who grasp these correlation dynamics can leverage this knowledge for better trading strategies and to attain portfolio diversification.

It should be noted that correlations offer insight into existing relationships between assets but do not possess forecasting abilities. They are prone to alterations during times of market volatility. In times of volatility, correlations tend to increase.

How do economic indicators affect intermarket trading?

Economic indicators affect intermarket trading a lot because they are used as input in trading strategies for buy and sell signals, in addition guiding allocations into different assets.

What role does technology play in intermarket trading?

Technological advancements have been the driving force behind intermarket trading. Instantaneous data analysis capabilities enable algorithmic trading, which ensures faster and more effective transaction execution. The rise of the digital economy has played a crucial role in advancing trade between regions by reducing trade costs and bolstering market demand.

The surge in efficiency due to technological innovations significantly improves trade across different regions, expanding the variety of products available and encouraging an increase in trade outflows. This evolution is transforming strategies within various markets.

Can intermarket trading improve portfolio diversification?

Yes, intermarket trading improves portfolio diversification because trading across different markets is an effective tool for enhancing portfolio diversification through the inclusion of a range of asset classes. This approach allows investors to build resilient portfolios by exploiting the relative strengths of various markets in order to mitigate market volatility.

How can traders leverage cross-market arbitrage in intermarket trading?

Traders can leverage cross-market arbitrage in intermarket trading by seizing advantage of price discrepancies between different markets. For these opportunities to be harnessed effectively, automated trading systems, with their quick execution, are indispensable as they facilitate immediate action on fleeting price variances.

To exploit cross-market arbitrage successfully, traders need to conduct extensive research to decipher the roots of pricing anomalies and ensure they have entryways into various markets where such inefficiencies can occur.

What advanced technical indicators are most effective for intermarket trading?

Advanced technical indicators that are the most effective for intermarket reading might be these:

  • Correlation
  • Relative Strength Index
  • Rate of Change (for momentum)
  • Sochastics
  • Bollinger Bands

Traders employ the Rate of Change (ROC) indicator which tracks the percentage variation in price over successive periods. This allows for an assessment of momentum variations among varying types of assets and enhances precision within intermarket analysis strategies.

How does the concept of relative strength apply to intermarket trading?

The concept of relative strength is an important concept in intermarket trading. It’s important, because relative strength is the cornerstone in intermarket trading as it focuses on selecting investments that have a track record of outshining their respective market or benchmark.

Instruments such as the Relative Strength Index (RSI) and ratio analysis are key to leveraging this concept, offering a clearer understanding of economic circumstances and guiding choices regarding sector rotation or establishing spread trades.

Yet, during times of volatility, traders should have a margin of safety because of brutal reversals.

What are the challenges of applying intermarket analysis in algorithmic trading?

The challenges of applying intermarket analysis in algorithmic trading are these:

  • The potential hazards posed by market volatility since algorithms might struggle to adjust to sudden changes that contradict their established parameters promptly.
  • Issues with technology, including problems with hardware or troubles related to network connections, can interfere with the execution of trades.
  • Ethical concerns bring up issues regarding possible market manipulation and increasing discrepancies in market fairness.

There is a risk that algorithms too finely tuned to past data may perform inadequately in live situations (curve fitting). This highlights the importance of maintaining equilibrium between automated systems and human supervision.

How does the yield curve inversion impact intermarket trading strategies?

An inverted yield curve in financial markets frequently serves as a warning of an impending economic slump. Such an event affects intermarket trading strategies by:

  • Initiating a reevaluation of the associated risks
  • Resulting in a strategic move toward safer investments, like long-term Treasury bonds
  • Affecting the performance across different industry sectors

In light of this warning sign, traders must modify their approaches to prepare for a likely recession. This necessitates that they develop innovative techniques to maneuver through market conditions.

This inversion also bears implications for currencies and assets within emerging markets, indicating possible shifts in international investment flows which subsequently impact intermarket trading strategies.

How can traders identify and exploit intermarket divergences?

Traders can identify and exploit intermarket divergencies when markets that usually move in tandem suddenly start heading in opposite directions. Traders compare the trends of two historically aligned markets, seeking moments of divergence. Upon spotting this discrepancy, they place their trades against the market showing weakness, with an anticipation that it will realign with its usual correlation partner.

Traders can employ platforms such as TradeStation to investigate intermarket relationships and craft strategies that bank on a return to traditional correlations.

What are the limitations of correlation in predicting intermarket movements?

The limitation of correlation in predicting intermarket movements is that correlations vary a lot and tend to break down at intervals. While correlation coefficients shed light on co-movement, they do not possess the predictive accuracy necessary for consistently foreseeing future trends in the market. Please look at our volatility trading strategies.

The fixed correlation presumptions found in Modern Portfolios’ theory are called into question by the fluctuating and evolving character of market interactions, especially during periods of heightened market volatility. This underscores the importance of adopting an adaptable method to analyze correlations—one firmly grounded in statistical principles.

How can volatility indices be used in intermarket trading strategies?

Volatility indices, such as the VIX, measure the equities market atmosphere and, by extension, influence forex markets. These indices enable traders to evaluate implied volatility, which can aid in refining their strategies across different markets and forecasting future equity trends.

Financial instruments derived from these volatility indices – including futures and options based on the VIX – provide opportunities for protection against fluctuating levels of market uncertainty or speculation rooted in anticipated changes in volatility. Such tools enhance intermarket analysis when used alongside other technical indicators like Bollinger Bands.

What are the ethical considerations in automated intermarket trading systems?

Concerns about equity and the integrity of financial markets have surfaced with the deployment of automated intermarket trading systems. If these AI-enabled systems are not carefully architected, they can unintentionally embed biases that skew trading decisions, potentially disadvantaging some market participants. The emphasis on profit at the expense of ethical considerations poses serious concerns related to potential market manipulation and contributes to inequality.

Significant ethical implications exist regarding employment displacement and the emergence of new positions requiring knowledge of artificial intelligence technologies and adherence to regulatory standards.

Can intermarket trading strategies work in both rising and falling markets?

Indeed, intermarket trading strategies work in both rising and falling markets. By concentrating on the correlations among diverse asset classes rather than just a single market, intermarket trading strategies have the potential to be effective in markets that are ascending as well as those that are descending.

How do economic indicators like GDP growth affect intermarket trading?

The direction and dynamics of various markets within intermarket trading are substantially influenced by economic indicators, like GDP growth. This shapes the strategies that hinge on anticipated performance across equities, bonds, commodities, and currencies.

What role does technology play in intermarket trading?

Technology plays an indispensable role in intermarket trading because of its ability to analyze data instantaneously, execute trades via algorithmic strategies, and leverage machine learning for forecasting market trends and mitigating risks.

Is it necessary to use advanced technical indicators in intermarket trading?

No, it’s not necessary to use advanced technical indicators in intermarket trading. You have come a long way by using common sense, but the most important thing is to learn backtesting and strategy automation.

What are some ethical considerations in automated intermarket trading systems?

There are ethical issues to consider in automated trading systems such as the risk of reinforcing existing prejudices, facilitating market tampering activities, necessitating human supervision, and affecting job opportunities in the field of trading.

Summary

In this article, we have discussed intermarket analysis strategies that span various asset classes, looked at the relationships between them, and explored possibilities of developing trading strategies based on intermarket relationships. Intermarket analysis offers traders a varied toolkit for developing trading strategies. One added bonus of Intermarket is risk management and portfolio diversification.

Since starting this blog in 2012, we at QuantifiedStrategies.com have published several intermarket trading strategies, both free and paid.

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