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.
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.
Most of the trades involve US Dollar as either the base currency or the counter currency. Many traders make the mistake of only studying the economic factors that have the potential of affecting dollar.
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.
The chances of failure are more when you trade against a strong economy. The weak currency in the pair could tank badly while the strong currency in the pair may become stronger than what you calculated.
You must study the economies of both the currencies before you decide to trade a particular currency pair. The best trading strategy is to find the strong economy/weak economy pairing. This has the potential of giving maximum 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.
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.
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.
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.
Most of the trades involve US Dollar as either the base currency or the counter currency. Many traders make the mistake of only studying the economic factors that have the potential of affecting dollar.
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.
The chances of failure are more when you trade against a strong economy. The weak currency in the pair could tank badly while the strong currency in the pair may become stronger than what you calculated.
You must study the economies of both the currencies before you decide to trade a particular currency pair. The best trading strategy is to find the strong economy/weak economy pairing. This has the potential of giving maximum 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.
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.
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.
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading; stocks and forex. Read about Trend Forex System. Best Forex Signal Service. Download Forex Scalping Cheat Sheets!
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