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View Full Version : How to Pick the Best Currency Pair For Trading



johnsmith00710
06-30-2013, 07:16 AM
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 traders 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 you trade against a strong economy, the chances of failure are more. The weak currency in the pair could flop badly while the strong currency in the pair may appreciate more than what you calculated.


Study of the economies of both the currencies is essential before you decide to trade a particular currency pair. The best strategy is to choose the strong economy/weak economy pairing. This increases the potential of maximizing returns.


For example, when FED announced its intention of containing inflation in March 22, 2005 FOMC meeting; most of the other currencies tanked against the dollar. A string of other positive economic data also reinforced the dollar.


When the initial reaction was over, GBP rebounded and recovered its strength, due to the impressive economic growth of British economy at that time. However, Yen kept on depreciating due to the week performance of the Japanese economy during that time. Dollar gained more than 300 pips in two weeks against the Yen during this time.


Therefore, USD strength had a much higher impact on the struggling Yen as compared to the consistently strong GBP.


While choosing a currency pair, study the economies of both the currencies in the pair. You also must examine the behavior of various crosses. In brief, your best choice should always be the strong economy/weak economy currencies.


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