You want to become a currency trader. The most important question that you will ask is which currency pairs are the best for trading? You should focus on the four major currency pairs EUR/USD, GBP/USD, USD/CHF and USD/JPY in the beginning. You should consider becoming a specialist in US Dollar. Yes, its true; you should become a specialist in understanding and trading the greenback.
Each currency pair actually is a combination of two currencies. So if you are short in GBP/USD then you are in fact selling the GBP and buying the USD. In each of the four major currency pairs, USD is part of each currency pair.
This means that you should study and understand the fundamentals that drive the US Dollar and the US economy. You should also understand the workings of the Federal Reserve System (FED). Then you have done your homework. Now you can trade any one of the four major currency pairs as all of them depend on USD.
These four major currency pairs are the most liquid pairs and involve the vast majority of the trading in the currency markets. You should think like this, majors are the most heavily traded pairs and US Dollar is half of each major pair. If I can understand what drives the USD, it will have a huge impact on my trading profits.
The only thing you need to determine is your bias for USD. What do you think; USD will weaken or strengthen in the near and medium term. Then apply that bias to the major currency pairs.
Just a small reminder, when you buy a currency pair, you are buying the first currency and selling the second currency in the pair. Suppose, your bias is that USD is going to strengthen. You can go long on USD/CHF and USD/JPY. You can go short on GBP/USD and EUR/USD.
One bias, four trades! But each currency pair will react differently to USD. For example, if Euro is also strengthening. The currency pair EUR/USD will move less with USD also strengthening as compared to USD/JPY if JPY is weakening.
Lets say you can only afford to place one mini lot trade. You have a bearish bias for USD. What pair you should trade? You can consider going long on either GBP/USD or EUR/USD. But which one!
Take a look at British Pound (GBP) and the Euro (EUR) both at the same time. You should trade the stronger currency. Find out which of the two currencies is getting stronger. You can find that by taking a look at the EUR/GBP cross charts. If the EUR/GBP cross chart is going down, it means EUR is weakening and GBP is getting stronger. You should choose GBP/USD pair for entering a trade!
You should always evaluate the currency correlations for the major currency pairs in every trading plan that you create. Correlation is determined by what is known as the correlation coefficient. Correlation coefficient always ranges between +1 and -1. The correlations between the currency pairs are dynamic and can change any time. So you need to calculate the correlations at least on weekly basis to give you a fair idea of how the correlations are changing.
Each currency pair actually is a combination of two currencies. So if you are short in GBP/USD then you are in fact selling the GBP and buying the USD. In each of the four major currency pairs, USD is part of each currency pair.
This means that you should study and understand the fundamentals that drive the US Dollar and the US economy. You should also understand the workings of the Federal Reserve System (FED). Then you have done your homework. Now you can trade any one of the four major currency pairs as all of them depend on USD.
These four major currency pairs are the most liquid pairs and involve the vast majority of the trading in the currency markets. You should think like this, majors are the most heavily traded pairs and US Dollar is half of each major pair. If I can understand what drives the USD, it will have a huge impact on my trading profits.
The only thing you need to determine is your bias for USD. What do you think; USD will weaken or strengthen in the near and medium term. Then apply that bias to the major currency pairs.
Just a small reminder, when you buy a currency pair, you are buying the first currency and selling the second currency in the pair. Suppose, your bias is that USD is going to strengthen. You can go long on USD/CHF and USD/JPY. You can go short on GBP/USD and EUR/USD.
One bias, four trades! But each currency pair will react differently to USD. For example, if Euro is also strengthening. The currency pair EUR/USD will move less with USD also strengthening as compared to USD/JPY if JPY is weakening.
Lets say you can only afford to place one mini lot trade. You have a bearish bias for USD. What pair you should trade? You can consider going long on either GBP/USD or EUR/USD. But which one!
Take a look at British Pound (GBP) and the Euro (EUR) both at the same time. You should trade the stronger currency. Find out which of the two currencies is getting stronger. You can find that by taking a look at the EUR/GBP cross charts. If the EUR/GBP cross chart is going down, it means EUR is weakening and GBP is getting stronger. You should choose GBP/USD pair for entering a trade!
You should always evaluate the currency correlations for the major currency pairs in every trading plan that you create. Correlation is determined by what is known as the correlation coefficient. Correlation coefficient always ranges between +1 and -1. The correlations between the currency pairs are dynamic and can change any time. So you need to calculate the correlations at least on weekly basis to give you a fair idea of how the correlations are changing.
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Discover A Revolutionary New Forex Robot. Develop your own Forex Trading System.
