Understand your Currencies

Author: David Chia | Posted: 30-08-2007

In the forex markets, it is important to understand the nature of the currencies you are trading. It is worth knowing the characteristics of the currency pairs, since each of them exhibit distinct identities. There is a fact that most of the currencies might exhibit similar movement patterns, which can help a trader confirm price movements. Trader can look at two pairs of currencies that have almost similar or completely opposite price movement patterns to get better predictions. Let take an example of the close relation between the EUR/USD & USD/CHF.
The price movements of these two currency pairs are absolute mirror images. In short, they have an inverse relationship. If EUR/USD is rallying, then USD/CHF should have downward movement, and vice-versa.
How can traders take advantage of this? The most obvious fact is that one must not trade both the currencies at the same time. If one is long the EUR/USD, logically one should not be long the USD/CHF at the same time, since the USD/CHF would have a downward movement.
Neither is it wise to take opposing trades on these two pairs, because if the trade goes wrong, then the trader would incur losses in both the trades (although the trader also might have double profit if the trade goes right, but anyway, in forex trading, we focus on how to not get loss first).
Ideally, one should trade either of the two pairs. The best way to take advantage of this fact is to cross-check a trade by looking for confirmation factors on the other pair. If a trader is planning to take a long position in the EUR/USD, he can look for a similar short setup on the USD/CHF. If such an opposite setup is present in the USD/CHF, it only adds further credence to his long EUR/USD trade. It is just a check.
There are other currency pairs also which exhibit a close relation. This fact serves as a good rule of thumb to estimate the movement of the particular currency. Thus it is worth studying these relationships to gain a higher edge in the market. As you know, sometimes a basic knowledge can also serve as a turning point between failure and success.
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