Learn How to Pick Currency Pair for Forex Trading

Posted on August 24, 2008
Filed Under Forex |

One of the things that you need to decide - when trading on Forex - is what exactly currency you are going to trade. Or it is more correct to say - what exactly currency pair you are going to trade.

On Forex the money is traded in pairs, because you sell or buy one currency against the other.

The choice of the currency pair will influence a lot: your trading behavior on the market, your Forex trading strategy, what time of the day you will be focused most of all, what to consider good or bad, etc.

This is explained by a simple fact. Each currency has its own behavior. This behavior is not something like a stable set of rules, because Forex market is really full of changes. But you understand that each specific currency should react in a very specific way to the news from the world of economy, business, finances, politics and other info.

Let’s put a simple example. In relation to the war for oil the currency of the country which is buying the oil is going to be inflating, at least for a while, because the market will understand that this country will have problems, the price for the oil increases, its people will have to pay more - and the list goes on. The country which has large deposits of oil and sells it to the rest of the world is going to see the strength of its currency (unless this country is not attacked in the war for oil).

The situation is deliberately oversimplified, but it helps to show how currency is depending upon the situation, but this example helps to explain that each currency has its own behavior.

If you have a personal forex money manager or use an automatic trading software, then the choice of the currency pair is done not by you in most of the cases.

But if you are trading yourself, no one is going to do that choice for you.

There are some tips that can help to make a choice.

You can choose two similar currencies. Surely there is nothing like absolute similarity of the currencies, as they represent different countries and political entities. But you understand that it is possible to find two currencies that go in the same trend for most of the time. For example, the Swiss franc and the British pound. One more time, we do not say that their behavior is the same, but for most of the time you will see that they oscillate in the same trend. It is the pair where you are unlikely to see very huge jumps in pips, but you can make money from the small ups and downs of CHF and GBP.

Or you can choose the opposing currencies. This can be euro and US dollar. Surely these two are not mirror opposites, but very often they go against the trends of each other. If you can handle huge ups and downs, this can be a nice source of the profit.

Tags: Forex

Learn How to Pick Currency Pair for Forex Trading

Leave a Comment