Specialize In Trading US Dollar (Part I)
If you are a currency trader and focus on the four major currency pairs EUR/USD, GBP/USD, USD/CHF and USD/JPY, then you should consider yourself a specialist in USD. Yes, its true! You are a specialist in trading the greenback.
Each currency pair actually comprises two currencies. So if you are long in GBP/USD then you are in fact buying the GBP and selling the USD. In each of the major currency pairs, USD is part of the equation.
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 in the forex markets. They involve the vast majority of the currency trading. You should think like this. Majors are the most heavily traded pairs and US Dollar is half of each major pair. So if you can understand what drives the USD, it will have a huge impact on your trading plans.
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 to remind you, suppose you buy a currency pair. You are buying the first currency and selling the second currency in the pair! Suppose your form a bias that USD is going to strengthen. With this bias, you can go long on USD/CHF and USD/JPY. Similarly, you can go short on GBP/USD and EUR/USD.
With one bias, you have the possibility of four trades. However, each currency pair will react differently to USD. Suppose Euro is also strengthening. The currency pair EUR/USD will move less with USD also strengthening. USD/JPY will move more if JPY is weakening.
You have a bearish bias for USD. Lets say you can only afford to trade one standard lot. What pair you should trade? You can consider going long on either GBP/USD or EUR/USD. Which pair you should trade!
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!
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. - 23212
Each currency pair actually comprises two currencies. So if you are long in GBP/USD then you are in fact buying the GBP and selling the USD. In each of the major currency pairs, USD is part of the equation.
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 in the forex markets. They involve the vast majority of the currency trading. You should think like this. Majors are the most heavily traded pairs and US Dollar is half of each major pair. So if you can understand what drives the USD, it will have a huge impact on your trading plans.
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 to remind you, suppose you buy a currency pair. You are buying the first currency and selling the second currency in the pair! Suppose your form a bias that USD is going to strengthen. With this bias, you can go long on USD/CHF and USD/JPY. Similarly, you can go short on GBP/USD and EUR/USD.
With one bias, you have the possibility of four trades. However, each currency pair will react differently to USD. Suppose Euro is also strengthening. The currency pair EUR/USD will move less with USD also strengthening. USD/JPY will move more if JPY is weakening.
You have a bearish bias for USD. Lets say you can only afford to trade one standard lot. What pair you should trade? You can consider going long on either GBP/USD or EUR/USD. Which pair you should trade!
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!
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. - 23212
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 @ 12:53 AM
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