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I am sharing with you my personal fear index which I use to trade the EUR/USD. The Chart above was formed using excel with the blue line representing the “amount of fear in the market” and the Red line representing the EUR/USD Closing. We can clearly see the inverse relationship even without me working out the equations for you.
What is the value of fear derived from? From the difference of (Italy + Spain 10Yr Bond Closing Yield) – German 10Yrs Bond Closing Yield. The bond market is the core of the financial markets as everything else will be priced based on the bond conditions. If bond yield rises, it simply signify deteriorating economic conditions or even raising inflation (heighten interests rate to slow down economic activities and thus inflation). Now you see how important are bond yields indicating about our economy! When Bond Yield rises, it could also be due to Stella stock market performance which leads to lesser demand for bond and thus yield raised to compensate for the decrease in price of bond. In the Case of Euro, the latter case is definitely not true. Only the first case fits the Euro Conditions now which is deteriorating economic conditions.
Taking a break from technical analysis and move across 2 markets offers you inter market analysis which will give you more confidence in executing your trade. How it can help you?
As you see from the value of fear, it clears show no sign of drastic dropping and that means we can expect Euro to be down at the meantime. After this confirmation, now you can whip out your technical tools to analyze a good entry point to enter.
You can build your own personal fear gauge and it will guide you confidently in your trading! The validity of this gauge is developed last year when the debt crisis went back into the spotlight in the financial market. If you feel that the debt crisis will not come to an end so soon, then you can trust this gauge to perform for you.