Choosing The Right Currency Pair For Trading

Many forex traders choose the currency pair for trading without much study. Many traders make the mistake of forming their opinion around only one currency in the pair, ignoring the other currency in the pair. Right choice of the currency pair is essential for making good returns.

Most of the trades involve US Dollar as either the base currency or the counter currency. Many traders make the mistake of only studying the economic factors that have the potential of affecting dollar.

This neglect of the second currencys economic conditions can greatly hinder the profitability of the trade. This neglect also makes the odds of a loss high.

When trading against a strong economy, the chances of failure are more. The weak currency could flop badly while the strong currency may appreciate more than 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.

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.

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