The author of this article is a forex trading company serving retail forex traders.
what is domino effect
The basic description of the domino effect is that one or two currency pairs in a currency group first move in either of two trading sessions, and then the remaining currency pairs in the same currency group follow in the same direction. In the same currency group, the remaining currency pairs will follow in the next trading session or trading day.
When the first currency pair moves, it is like the first domino. When other currency pairs in the same currency group follow the first currency pair, they line up like dominoes, fall down one by one, and hit one after another. Each currency pair is a domino, some leading, some lagging, with its own cycle of movement.
For almost all forex traders, the domino effect is difficult to explain and understand, but it is obvious. As far as I know, this article is the only article on this topic, but the domino effect happens every week in the forex world. This is not necessarily a bad thing, as forex traders perform at their highest level and a deep study of forex knowledge and experience will challenge their highest level.
One of the problems with writing this article was accurately representing the charts and moving cycles that I see in my day-to-day spot forex trading. Finding the next "first domino" in a sideways or choppy market is important because this is how new trends can form and is what causes the domino effect. Here are a few examples:
Another problem is that 99% of forex traders don't use the methods we provide, so very few forex traders want this kind of knowledge. They don't know they need to know.
A solid understanding of parallel and reverse analysis and multiple time frame analysis is a prerequisite for understanding the domino effect. Less than 1% of forex traders actually use these techniques. You end up knowing more and more things that fewer and fewer traders can understand or even imagine. So the audience for this article is very limited. Our users will value this approach.
But we'll give it a shot and let experienced traders who have a better understanding of our methodology know why pairs move in their own order.
What causes the domino effect?
This is because the foreign exchange market is efficient, the largest and most efficient market in the world. More events happen in a single trading day on spot FX than in 90 trading days on the New York Stock Exchange. Spot foreign exchange is a huge market. All news, political and economic announcements, price levels, and market movements around the world are well known and not hidden, all factors have been taken into account by retail and institutional traders.
The inefficiencies that occur day-to-day in Forex must be offset to some extent because the market is so large and efficient. When the first domino falls, the rest of the currency pairs follow, if you can spot it.
Forex traders miss a lot
Trader 1 - Whoa, look, this pair moved! Trader 2 — I wonder why it moved? Trader 3 — which currency pair? Is it CAD/CHF? Why would anyone trade this currency pair? I only trade EUR/USD. Trader 4 - I understand why this pair is moving, I trade it, make a profit, and now I'm sure other pairs will follow.
Traders 1-3 are old-fashioned, using technical indicators to measure EUR/USD, because they are narrow-minded and unable to see the bigger picture. Trader 4 is an experienced "domino" trader who understands parallel and contrarian analysis and multiple time frames.
Trader 4 is unemotional, logical, deliberate, and takes the exact same information and uses it for current profits and potential future profits. Traders 1-3 see the exact same information, but get nothing out of it. Knowledge is not growing and profitability is not being achieved.
99% of forex traders are staring at one or two currency pairs with invalid forex technical indicators. They will never see the entire foreign exchange market as a series of dominoes, even though the chart is right in front of their computer screen. They don't see the bigger picture, simply because they don't see it, they don't want to see it, or they have wrong metrics that don't take individual currencies into account. This information will be obvious to them and any other trader.
In-depth analysis of numerous currency pair charts with multiple time frames on our monitoring tool, focusing on the movement of numerous currency pairs, may help fill in the gaps and help any forex trader understand how the dominoes are falling.
Domino Effect Example 1
In the case of the first example, all JPY currencies have been oscillating wildly for 10 days and are currently at stagnant support and are expected to start oscillating back to the upside.
AUD and NZD news was released during the Asian session, then AUD/JPY and NZD/JPY started to rise. Later in the European session, GBP/JPY, EUR/JPY and CHF/JPY followed, and during the US session following the CAD news, CAD/JPY followed other JPY exotics up .
Yen exotic currency pairs continued to move higher, eventually followed by USD/JPY the next day, the last domino to fall. Recognizing this, we have now introduced a level of predictability in the forex market, where movements can now be predicted. All yen exotics are up, with USD/JPY lagging but eventually following the trend. If you miss the first domino, you can still make a profit before it's too late.
Stuff like this is somewhat predictable because market inefficiencies sort themselves out. The yen started lower against some currency pairs before spreading to other currencies. Very logical. This example is about the Japanese Yen and related exotic currency pairs, but this happens every week for the 8 major currency groups.
Domino Effect Case 2
During the main trading session, EUR/USD and GBP/USD appreciated while USD/CHF and USD/CAD fell. During the Asian session later in the day, there was a piece of news from Australia that acted as a boost and AUD/USD rose after the news. The ineffectiveness was once again corrected by the market, and the dollar's weakness finally dealt a blow to another dollar pair.
Domino Effect Example 3
Support and resistance levels and the domino effect
EUR/USD and AUD/USD broke important resistance levels, and during the same trading session, USD/CAD and USD/CHF also broke to new lows. GBP/USD at resistance, what's next? The next and last domino to fall, in the next session GBP/USD will break its resistance and 'catch up' to other USD pairs on USD weakness, possibly after some GBP news drivers .
Inefficiency is corrected for by the overall efficiency of the foreign exchange market, with a degree of predictability. How much information does this require? Need not. Just use a set of very simple forex trend indicators to analyze the market and watch the market move.
Domino Effect Example 4
All Swiss franc pairs move sideways, a bit choppy, but directionless. Swiss franc / entered a downward trend, and the movement is obvious. It looks weird when you notice movement. What's next? I don't know, but at some point, if CHF/JPY continues down, many pairs will move based on a stronger JPY or a lower CHF. You don't quite know yet.
If you're assessing the market, your chances of trying to discover which currency group is likely to move next will increase dramatically. You may have found the first domino but don't know which domino will fall next, just narrow it down to the CHF or JPY currency pairs. Such information can help us set price alerts to monitor price movement, help create trading plans, and spot new or potential new trends.
Forex Trends and the Domino Effect
If most of the 28 currency pairs we track are trendless or flat, the market becomes volatile and more difficult to trade. Consolidation is fine because the market is resting and trying to decide its next move, so your job is to figure out the next move or breakout. For example, if the entire market is consolidating.
Then, NZD/USD made a strong breakout and entered an uptrend, the market gave a strong signal, but most traders simply could not understand that the dominoes are falling and the market may trend again. If this happens, you'll have to look carefully at the charts and news impetus to understand why NZD/USD is breaking out.
Is the New Zealand dollar starting to move higher? Did the USD pair start to move, what happened? If you use our indicator set to assess the market and forex news, you should know which currency pairs are moving the market. The cues and signals the markets provide are right there on your computer, but can be easily overlooked.
Spotting the first or second domino is important because in a non-trending market, the first domino will start a new trend or series of trends in one or more currency pairs. This is very powerful.
In non-trending markets, traders should continue to set voice price alerts as important breakouts occur, as trends start or breakouts occur, and will be able to capture these moves with the help of relevant tools. Our tool will find all moves in the market, including initial moves when a trend starts to break out. Then look for the next domino using the market analysis techniques we use, such as aggregate market analysis using single currency multiple time frames.
The same thing happens in reverse. Over the course of a few days, a trending market can turn into a range-bound market. You observe a trend in several currency pairs and they all start to consolidate. In the next few days, some currency pairs will reverse against the trend of the "reverse domino effect", which may be beneficial to some short-term traders who trade against the trend. As a trader, can you spot all of these situations?
discover dominoes
A full-time trader watches the entire market on a daily basis, observing numerous time frames and currency pairs, and it will start to make sense. When you see a market move that leads to inefficiency, pay attention to it and remember that at some point it will correct itself. We have the tools to show intraday moves and potential invalidities, because once again you're looking at the entire forex market. Be observant, and to some extent, the market will have a certain degree of predictability.
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