Learn To Choose The Right Currency Pair For Trading
April 29, 2009 by Hass67
Filed under Stock Market
The choice of the right currency pair in forex trading is very important. Many traders make the mistake of shaping opinion around only one currency, ignoring the other currency in the pair.
US Dollar is the most important currency in the global economy. It is heavily traded against other currencies like Euro, British Pound, and Yen etc. Many trader trade currency pairs involving USD. They make the mistake of only studying US Dollar while ignoring the other currency in the pair.
In the forex market, this neglect of the foreign economic conditions can greatly hinder the profitability of the trade. It also increases the odds of a loss. You need to understand a little bit of fundamental analysis when you make your choice of the currency pair.
When trading against a strong economy, the chances of failure are more. The weak currency could flop badly while the strong currency may appreciate more than you calculated.
While choosing a currency pair to trade, one should study the economies of both the currencies. Finding the strong economy/weak economy pairing is the best strategy to use when maximizing returns.
Lets take an example, FED announced its intention of containing inflation in March 22, 2005 Federal Open Market Committee (FOMC) meeting. Most of the other currencies tanked against the dollar on the release of the announcement. Other positive economic data also reinforced the dollar.
While after the initial tanking, GBP rebounded and recovered its strength, due to the impressive economic growth of British economy at that time. Yen kept on depreciating. Japanese economy was weak in those days. Dollar gained more than 300 pips in two weeks against the Yen.
Therefore, USD strength had a much higher impact on the struggling Yen as compared to the consistently strong GBP.
When you choose a currency pair, study the economies of both the currencies in the pair. You also need to examine the behavior of various crosses. In nutshell, the best choice is always choose the strong economy/weak economy currencies.
