Specialize In Trading US Dollar (Part I)
You are a currency trader. Which currency pairs are the best for trading? Focus on the four major currency pairs EUR/USD, GBP/USD, USD/CHF and USD/JPY. Consider becoming a specialist in USD. Yes, its true! You should become a specialist in 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 if you study and understand the fundamentals of US Dollar, the US economy and the workings of the Federal Reserve System, then you have done your homework needed to trade any one of the four major currency pairs.
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.
Think whether USD will weaken or strengthen in the near and medium term. The only thing you need to determine is your bias for US Dollar before trading a major. Develop a system that guides you in forming an educated bias and then apply that bias to the major currency pairs.
Just to remind you when you buy a currency pair, you are buying the first currency in the pair and selling the second currency. Suppose your form a bias that US Dollar is going to become stronger. With this bias, you can go long either on USD/CHF or USD/JPY. Similarly, you can go short either on GBP/USD or EUR/USD.
With one bias, you have the potential of entering into four possible trades. However, each currency pair will react differently to US Dollar strengthening or weakening. Suppose Euro is also strengthening. Both Euro and US Dollar are strengthening at the same time. The currency pair EUR/USD will move less. USD/JPY will move more if JPY is weakening and USD is strengthening.
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 both GBP and the Euro. Try to find which of the two currencies is stronger right now. Trade the stronger currency. Take a look at the cross EUR/GBP. If it is down, it means EUR is weakening and GBP is strengthening. Trade GBP/USD!
Always include an evaluation of the currency correlations for the major pairs in every trading plan that you make. The correlations between the currency pairs can change any time. So you need to calculate the correlations on weekly basis at least to give you a fair idea. Correlation is determined by what is known as the correlation coefficient which always ranges between +1 and -1. - 23200
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 if you study and understand the fundamentals of US Dollar, the US economy and the workings of the Federal Reserve System, then you have done your homework needed to trade any one of the four major currency pairs.
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.
Think whether USD will weaken or strengthen in the near and medium term. The only thing you need to determine is your bias for US Dollar before trading a major. Develop a system that guides you in forming an educated bias and then apply that bias to the major currency pairs.
Just to remind you when you buy a currency pair, you are buying the first currency in the pair and selling the second currency. Suppose your form a bias that US Dollar is going to become stronger. With this bias, you can go long either on USD/CHF or USD/JPY. Similarly, you can go short either on GBP/USD or EUR/USD.
With one bias, you have the potential of entering into four possible trades. However, each currency pair will react differently to US Dollar strengthening or weakening. Suppose Euro is also strengthening. Both Euro and US Dollar are strengthening at the same time. The currency pair EUR/USD will move less. USD/JPY will move more if JPY is weakening and USD is strengthening.
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 both GBP and the Euro. Try to find which of the two currencies is stronger right now. Trade the stronger currency. Take a look at the cross EUR/GBP. If it is down, it means EUR is weakening and GBP is strengthening. Trade GBP/USD!
Always include an evaluation of the currency correlations for the major pairs in every trading plan that you make. The correlations between the currency pairs can change any time. So you need to calculate the correlations on weekly basis at least to give you a fair idea. Correlation is determined by what is known as the correlation coefficient which always ranges between +1 and -1. - 23200
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.
posted by X - Men @ 12:52 AM
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