How Can I Choose The Best Currency Pair For Trading?
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.
USD is the most important currency in the world economy. USD is heavily traded against other currencies. Many trader trade currency pairs like USD/EUR, USD/GBP, USD/JPY, USD/CHF etc. Many make the mistake of only studying USD while ignoring the other currency in the pair.
This neglect of the other currency economic conditions can greatly hinder the profitability of the trade. It also makes the odds of a loss high.
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 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.
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.
It is apparent that USD strength had a much higher impact on the struggling Yen as compared to the consistently strong GBP. Trading USD/Yen would have been more profitable as compared to trading USD/GBP.
Study the economies of both the currencies in the pair. Examine the behavior of various crosses. In short, when you choose the currency pair try to keep the strong economy/weak economy pairing in mind for maximum returns.
