If you analyze the four financial markets, the stock market, the bond market, the currency market and the commodities market, then you end up with inter-market analysis. The purpose of inter-market analysis is based upon the idea that no market is independent of the others and that they are all inter-connected. What happens in the bond market can have a direct impact upon the other markets, and vice versa. Analyzing all of the markets can, in theory, offer a clearer predictive picture than a technical analysis of a single market might.
Inter-Market analysis operates on the theory that, since all markets are connected, if an event causes one market to move, then the other markets will also react to the same event, though other markets may react differently.
There are several rules associated with the theory of inter-market analysis. One is that as the demands for stocks increase, so does the demand for that domestic currency. Another is that the commodities market and the dollar will always trend in opposite directions.
Normally, traders will only evaluate a single market. If a technical trader is evaluating the foreign exchange market then he will not focus on the other three markets. This is where inter-market analysis differs. And inter-market trader will evaluate all four markets to analyze the influence of interest rates, so find out where the money is flowing, and to see where the trends are at. In many cases, analyzing the different markets can offer different information about different economic conditions. Analyzing the comedies market can offer a trader information on inflation. Analyzing the bond markets would give traders information about interest rates.
Fundamental analysis and inter-market analysis are very similar. Most foreign exchange traders who use fundamental analysis will just examine the foreign exchange market. However, that is not always the case. Many foreign exchange traders will examine more than one market at a time.
John Murphy is the father of inter-market analysis. He started off as a technical trader but eventually began looking at how the different markets were all affected by similar events. He developed the intra-market system to forecast price movements. The foreign exchange market uses inter-market analysis to study the market from an analytical perspective.