Open an Account
☰
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Open an Account
✖

How to trade Equity Indices using Foreign Exchange

October 21, 2021 12:05 PM

When looking at the Equity Indices vs foreign exchange pairs, traders often point to the inverse correlation between the SPX 500 and the DXY, that is, when one asset moves higher the other moves lower.  However, that isn’t always the case.   For example, the current daily correlation coefficient between DXY and SPX 500, shown on the bottom of the chart below, is -0.57.  Although this is a negative correlation, it is not considered significant. Traders should look for correlation coefficients +0.80 or -0.80 for it to be significant.

Source: Tradingview, Stone X

What is the US Dollar Index (DXY)?

On 240-minute timeframe between DXY and the SPX 500, the correlation is -0.78, which is considered borderline. If traders decide to use this correlation on the shorter timeframe as part of their decision-making process, make sure there are plenty of other confirming indicators.

Source: Tradingview, Stone X

Other USD pairs and SPX 500

Although DXY may not be the best US Dollar instrument to use to determine correlation, there are plenty of US Dollar pairs to look at which currently are a good fit. For example, sticking with the SPX 500 as a popular broad market equity index, the daily correlation between SPX 500 and the NZD/USD is +0.91!  Therefore,  if one looks at the NZD/USD and believes the pair is ready move higher, there is a good chance that the SPX 500 will move higher with it.  Notice however that NZD/USD is running into resistance at the 61.8% Fibonacci retracement from the highs of February 2020 to the lows of August 20th, near 0.7212.  The pair may be ready to pause or pullback at this resistance level.

Source: Tradingview, Stone X

On a 240-minute timeframe the correlation is almost a perfect positive correlation at +0.95! Therefore, if NZD/USD pulls back soon, there is a good chance that the SPX 500 may pull back along with it in the shorter timeframe.

Source: Tradingview, Stone X

 

Trade NZD/USD now:  Login or open a new account!

 

Non-USD currency pairs and SPX 500

Looking across the board of current correlation coefficients between the SPX 500 and fx pairs, there are some very strong correlations between the 2 assets on a 240-minute timeframe.  These should be used for analysis on a medium-term basis.  Some of the stronger readings are as follows:

  • AUD/USD (+0.95)
  • GBP/USD (+0.89)
  • USD/CAD (+0.83)
  • CAD/JPY (+0.81)
  • AUD/CAD (+0.95)
  • AUD/CHF (+0.88)
  • AUD/JPY (+0.94)
  • AUD/NZD (-0.83)
  • EUR/AUD (-0.96)
  • EUR/MXN(-0.81)
  • EUR/NOK (-0.85)
  • EUR/NZD(-0.97)
  • GBP/AUD (-0.91)
  • GBP/JPY(+0.83)
  • GBP/NZD (-0.95)
  • GBP/ZAR (-0.89)
  • NZD/CAD (+0.95)
  • NZD/JPY (+0.96)
  • USD/MNX (-0.90)
  • USD/NOK (-0.87)
  • USD/SEK (-0.84)
  • USD/ZAR (-0.94)

 

Trade FX now:  Login or open a new account!

 

Not all indices are equal

Not all equity indices are the same.  For example, when checking the correlation between the FTSE 100 or the German Dax and the above currency pairs, only a few are within the strong correlation area.  For example, the currency pair with the highest correlation to the S&P 500 on a 240-minute timeframe is EUR/NZD with a correlation coefficient of -0.97.  However, went compared to the FTSE 100, the correlation is extremely weak, at -0.26.  Although there is still an inverse correlation, a reading such as this should not be used as a signal to trade.

Source: Tradingview, Stone X

If fx traders would like to trade equity indices, but may not have access, the correlation coefficient can be a useful tool.  If there is a strong reading between the equity index (such as the SPX 500) and a currency pair (above +0.80 or below -0.80), traders can use the fx pair as a substitute for the index.  However, note that the signal is only for direction, not magnitude.

Learn more about forex trading opportunities.

 

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

FOREX.com is a registered FCM and RFED with the CFTC and member of the National Futures Association (NFA # 0339826). Forex trading involves significant risk of loss and is not suitable for all investors. Full Disclosures and Risk Warning. Increased leverage increases risk.

GAIN Capital Group LLC (dba FOREX.com) 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA. GAIN Capital Group LLC is a wholly-owned subsidiary of StoneX Group Inc.

© FOREX.COM 2025