The domino effect could be considered a rather advanced topic for forex traders. The simple definition of the domino effect is when one or more forex pairs in an individual currency group make solid moves either upwards or downwards on the basis of a single currency’s strength or weakness. As a result, the rest of the pairs in the same currency group keep moving in the same direction, imitating the way a set of dominoes falls. Visit multibank group
The domino effect could take place one session after another with currency pairs in the same group. As they start moving, other pairs in the same currency group follow suit in the upcoming trading session. There are two types of trading sessions–the Asian trading session and the main trading session.
Domino Effect
The domino effect could continue on consecutive days with one or more pairs in the same currency group moving on one day while the rest move on the next day. Now, we understand that this could be difficult to visualize so let us help you with some examples.
Consider the falling of the first pairs as the first domino falling. So, if there are other pairs lined up in the same individual currency group right after the first pair, they’d all fall like a set of dominoes that keep knocking down one another. Every single currency pair operates like a domino since you have leading pairs as well as following pairs that accompany their individual movement cycles.
The domino effect could become difficult to explain and comprehend for a majority of forex traders, but once you see what it is and how it works, it doesn’t appear to be a problem.
A forex trader who has their basics right when it comes to multiple time frame analysis, as well as parallel and inverse analysis, would easily understand the domino effect. When you check the everyday time frames for all pairs, you’ll be able to see the domino effect clearly, if the charts you work with are set up by individual currency.
If you look at an individual pair in a way that it cannot be impacted by external factors, you’re preparing yourself for failure. Instead, make the effort to understand the way the domino effect plays out and plan your moves accordingly.
What causes the domino effect?
The domino effect takes place in the forex market because of its large size and efficiency.
The inefficiencies in the forex market that do take place are automatically balanced out thanks to the market’s large size and smooth operations. It is only a matter of spotting the domino. As soon as one falls you will know that other currencies will also behave in a similar way. Whether that currency gets stronger or weaker, it will pass on that trait to other pairs within the same common currency group of pairs.
Examples
At this stage, if you’re still feeling unsure about the domino effect, we can take you through some examples. A majority of forex traders focus on a pair or two and their forex technical analysis and indicators are also not optimized. They fail to see the forex market as a series of dominoes, despite the charts indicating them clearly. They fail to see the big picture because they are not paying attention or are perhaps in denial of the domino effect. The information is literally out there for everyone to access.
Therefore, traders should first put in place forex trend indicators by individual currency and begin to assess markets on a daily basis across different time frames to be able to see the domino effect clearly.
Using support or resistance breakouts to find the dominoes:
The EUR/USD and AUD/USD often break key resistance in the main trading session. Also, the USD/CAD and USD/CHF tend to break through to new lows. The USD weakness becomes obvious as it makes its way to the market through these four pairs. The GBP/USD is steady at the position of resistance, however, a key announcement or piece of news may affect GBP news as per the economic news calendar. The following day, once the news is out the GBP/USD breaks through its resistance and comes at par with the other pairs based on USD because of its weakness.
While the above scenario is much more direct, a lot of traders still miss the domino effect because of their trading system.
The market’s inefficiency gets corrected which was somewhat predictable. One needs to be able to understand the market and conduct a proper analysis, check the news calendar to be able to spot this.
Trends and domino effect:
In a market with no visible trends, traders must keep setting audible price alerts while searching for new daily trends. Notable breakout points as well as when the new trends begin to shape up, these movements are easy to spot with the right tools. The heatmap would make it easier to identify all market moves even the initial ones as breakout trends start forming. This is when you should start hunting for the next domino effect with the help of multiple, time frame analysis by individual currency.
Reserve currencies and commodity-based currencies:
We are able to carry out trades with eight currencies in our forex market opening time trading system. The CAD, AUD, and NZD-based pairs are called commodity currencies as they are linked to different commodities while the rest are reserve currencies.
In case the GBP/AUD and GBP/CAD move sideways only to move up further and create new trends, it indicates that the GBP is becoming stronger against the commodity currencies. Thus, the next domino that would fall would be GBP/NZD since GBP is in a stronger position than the other two commodity-based currencies. When the GBP increases against AUD, CAD, and NZD, it is likely that the GBP will strengthen against the reserve currencies. The GBP/USD and GBP/CHF would then keep moving up as the dominoes fall. The GBP could even get stronger in comparison to the reserve currencies first before the commodity-based currencies follow suit.
