How Can I Choose The Best Currency Pair For Trading? PDF Print E-mail
Written by Hass 67   
Wednesday, 29 April 2009 15:32
While deciding which currency pair to trade, many traders make the mistake of forming their opinion around only one currency in the pair, ignoring the other currency. Right choice of the currency pair is essential for making profitable trades.
by Hass67


While deciding which currency pair to trade, many traders make the mistake of forming their opinion around only one currency in the pair, ignoring the other currency. Right choice of the currency pair is essential for making profitable trades.

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 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.

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 make it clear with an example, FED announced its intention of containing inflationary pressures in the US economy in March 22, 2005 FOMC meeting. Most currencies depreciated against the dollar on the release of the announcement. During that time, 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 the various crosses. In brief, your best choice should always be the strong economy/weak economy currencies.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading; stocks and forex. Read about Trend Forex System. Best Forex Signal Service. Download Forex Scalping Cheat Sheets!