In the financial market, there are many instances of resonance among various instruments, such as resonance among non-US currencies in the foreign exchange market, resonance among related commodities in the futures market, and resonance among stocks in the same sector in the stock market. Making rational use of the resonance between products can be of great assistance to our trading.

Resonance trading in instruments has three main advantages:

1: Simplicity, making it easy to observe and identify opportunities. When the trend of resonant instruments deviates, it is very easy to recognize on a candlestick chart, such as different high and low points, different consolidation patterns, and different break times. This is simpler and clearer compared to making analysis based on observed indicators.

2: Clear direction and ample space during resonance. When products resonate, the forces of multiple instruments concentrate in one direction, creating a larger trend space and faster trend movement, which is conducive to capturing significant profits.

3: Strong universality. Resonant instruments and trends are very common in various financial markets, and the trading methods are the same.

In today's article, I will explain the basic knowledge of product resonance and three methods of trading using product resonance.

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1. What is instrument resonance?

In the financial market, many products have the characteristic of resonance, where they exhibit similar patterns, structures, breaks, or trends.

Resonance has two forms of expression: one is unidirectional resonance, and the other is mirror resonance.

Unidirectional resonance refers to the situation where the trends of two or more instruments move in the same direction, such as gold and silver, US crude oil and Brent crude oil, etc., which are long-term in sync with each other in terms of rising and falling. We can describe the trend between instruments as positively correlated.The resonance of mirror images refers to the phenomenon where two or more commodities move in opposite directions; when one asset forms a top pattern, the corresponding asset will form a bottom pattern. If one asset breaks downward, the other will break upward. For example, the Euro against the US Dollar and the US Dollar Index, or the US Dollar against the Canadian Dollar and US crude oil, we can describe the trend between these assets as being negatively correlated.

2. Why does resonance occur?

There are mainly three reasons:

(1) Same category.

Commodities within the same category have similar supply and demand relationships, common attributes, or substitutability, which leads to resonant trends.

The most representative example is silver and gold. Additionally, US crude oil and Brent crude oil, domestic coking coal and coke, and hot-rolled and cold-rolled steel sheets all belong to the same category, almost rising and falling together.

There can also be resonance among more than two commodities, such as US oil, Brent oil, and gasoline exhibiting resonant trends. Another example is the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite Index.

(2) Fundamental relationship.

There is a very strong correlation between the fundamentals of different products, leading to resonant trends. For instance, the Canadian Dollar and crude oil have a strong fundamental connection because the Canadian economy is highly dependent on crude oil. An increase in crude oil prices benefits the Canadian economy, leading to an appreciation of the Canadian Dollar, and vice versa.

Another example is the Euro and the Swiss Franc, which were pegged to each other before 2015. Although the peg was removed after the Swiss Franc "Black Swan" event in 2015, the correlation between the two currencies remains very strong. The Euro against the US Dollar and the US Dollar against the Swiss Franc have long been in a negatively correlated resonant trend.(3) Cross trades of the same currency pair.

For instance, cross trades within the same pound family, such as GBP/USD, GBP/JPY, GBP/CHF, and GBP/AUD, are all fundamentally influenced by the British pound and tend to exhibit a resonant trend in the same direction over the long term. Other European cross trades, Japanese cross trades, and so on, also have similar resonant trends.

Note: Attentive friends may notice that there is a certain difference in the trend between silver and gold. Last Thursday, gold reached a new high, but silver did not reach a new high.

This resonant trend relationship is similar to the relationship between the body and its shadow, which is basically in sync, but under certain circumstances, the changes of the body and shadow are not completely synchronized, resulting in some technical differences on the candlestick chart, and these technical differences are the exceptions to the resonant trend of the currency pair.

Over time, the product trend will return to normal and continue to resonate synchronously. The transition from the exception to the norm is the trading opportunity we can look for.

3. How to trade with currency pair resonance?

Method 1: Product resonance + technical level analysis trading

Use product resonance as an important means of technical analysis. When the market reaches a technical level and there is a deviation in product resonance, use the resonance deviation to confirm the trading opportunity to enter.

Take the recent trend of gold and silver as an example. The upper part of the chart is the 1-hour candlestick chart of gold, and the lower part is the 1-hour candlestick chart of silver.

After a significant increase, gold tested the resistance zone near 1790-1800, and there is an expectation for the market to correct downward.On August 4th, gold tested the upward pressure at 1790 and set a new high, but silver, at the 1-hour level, surged upward without setting a new high, and even failed to test the previous high pressure. The two commodities exhibited a resonance deviation in their trends. Combined with the expectation of gold bears, the probability of a fake breakout to the upside in gold increased. After gold formed a reversal candlestick, it was a good time to enter the market. Subsequently, the market fell rapidly and significantly, with a very small stop loss and an ideal risk-reward ratio.

Method 2: Seeking trading opportunities from breakouts (some break out first, others later)

Among the resonant commodities, the overall trends are similar, but there are differences in details. For example, the timing of structural breakouts may differ. In practice, one can take advantage of the time difference in breakouts among resonant commodities to find trading opportunities.

Both commodities experienced a downtrend and bottomed out on July 22nd. Afterward, the market rebounded upward. The British pound against the New Zealand dollar formed an upward breakout after consolidation following the bottom (blue circle in the chart) on July 26th, confirming a bullish trend.

However, on July 26th, the British pound against the Australian dollar did not break out to the upside, creating a very clear resonance deviation. After the British pound against the Australian dollar had a very clear opportunity to break out and go long, one could wait until July 27th when the British pound against the Australian dollar actually broke out (with the previous day's confirmation of the British pound against the New Zealand dollar's breakout, the success rate of the British pound against the Australian dollar's upward breakout structure was higher).

Method 3: Catch-up rallies or declines

The trends of resonant commodities should be synchronized, but in a market with a clear direction and obvious expectations, if one commodity rises or falls first by a certain amount, the remaining commodities may have the potential for catch-up rallies or declines. One can use this time and space difference in trends to enter trades.

Since entering July, both gold and silver have seen significant bearish trends. Silver tested the weekly support level on July 14th, which also coincided with the round number support at $18, and did not break. The market began to consolidate horizontally, indicating a need for an upward correction.

Gold, after a significant drop, tested the weekly low support at 1678 on July 21st, and the market also had a need for an upward correction.This market trend can be summarized as follows: Silver first fell to support and then entered a consolidation phase, waiting for gold to drop to its target level. After testing the support at 1678, gold quickly formed a reversal pattern on the hourly chart, breaking through the downtrend line on the hourly chart, confirming the reversal. At this time, silver is expected to move upward, but it still maintains a low horizontal consolidation pattern without rising, silver is still in place, while gold has already broken upward, having risen for a certain space. Silver has a very obvious catch-up rally expectation, and the aggressive ones directly choose the low point of silver's pullback to enter the market. Everyone can see in the chart that, due to the catch-up rally trend, the entry point for silver is at the start of the market movement, with a low entry price and a small stop-loss space. After breaking through, the running space is larger than that of gold. Therefore, the entry stop-loss is small, the profit space is large, and the risk-reward ratio is very reasonable. The above three are the most common trading opportunities using product resonance.

4. Precautions for Resonance Trading

(1) On Wenhua Financial and Boyi Master, different varieties of K-lines can be overlaid on the chart, making it easy to discover the detailed differences in trends.

(2) The resonant varieties must select trading opportunities on the same time cycle, such as gold 1 hour and silver 1 hour.

(3) It is not advisable to trade on too short a time cycle, as short cycles are less stable. It is recommended to operate above the 1-hour level.(4) Opportunities for resonance trading are not abundant, requiring multi-variety screening, and cross-currency trades of the same variety tend to have more trading opportunities.