Currency Pairs To Trade Today

Currency Pairs To Trade Today – The general forex market generally outperforms the general stock market. Why? The stock market, which is actually a multi-stock market, is driven by the micro-dynamics of some companies. On the other hand, the forex market is driven by macroeconomic trends that can sometimes last for years.

These trends are most evident in major pairs and commodity block currencies. Here we take a look at these trends and explore where and why they occur. Next, we will also look at what types of pairs offer the best limited trading opportunities.

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It is understandable why the United States, the European Union and Japan have the most active and liquid currencies in the world, but why the United Kingdom? Finally, as of 2020, India has higher GDP ($ 2.65 trillion compared to $ 2.63 trillion in the UK), while Russia’s GDP ($ 1.57 trillion) and Brazil’s GDP ($ 2.05 trillion) corresponds to almost all UK economic performance.

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The explanation that applies to most of the forex market is traditional. Britain was the first economy in the world to develop advanced capital markets, and the pound sterling was once the world’s reserve currency, not the US dollar. Due to this heritage and London’s dominance as the center of world currency trading, the pound is still considered one of the world’s major currencies.

The Swiss Franc, on the other hand, ranks among the four major currencies due to Switzerland’s famous neutrality and fiscal prudence. The Swiss Franc used to be 40% gold-backed, but is still known to many forex traders as “liquid gold”. In times of turbulence or economic stagflation, traders turn to the Swiss Franc as a safe currency.

The largest major pair – actually the most liquid financial instrument in the world – is EUR / USD. This pair trades at face value of nearly $ 1 trillion a day, from Tokyo to London and New York, 24 hours a day, five days a week. These two currencies represent the world’s two largest economic actors: the United States with an annual GDP of $ 21.43 trillion, and the euro area with a GDP of around $ 13,335.84 billion.

While the US economy grew significantly better than the euro area (3.1% in the US compared to 1.6% in the euro area), the euro area economy has a net trade surplus, while the US has a chronic trade deficit. The excellent balance sheet position of the euro area – and the sheer size of the euro area economy – have made the euro an attractive alternative reserve currency to the dollar. As a result, many central banks – including Russia, Brazil and South Korea – have diversified some of their reserves against the euro. This diversification process takes time, as do many events or changes affecting the forex market. For this reason, the long-term outlook is one of the key attributes of successful trend trading in forex trading.

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To see the importance of this long-term perspective, take a look at the numbers below, both of which use a filter of three simple moving averages (three SMAs).

Figure 1. EUR / USD exchange rate chart from March 1 to May 15, 2005. Note that the recent price action indicates fluctuations and a possible start of a downtrend as all three simple moving averages are consistent with each other. Photo by Sabrina Jiang © 2020

The three SMA filter is a good way to measure the strength of a trend. The underlying premise of this filter is that if the short-term (7-day SMA), medium-term (20-day SMA), and long-term (65-day SMA) trends are in one direction, the trend is strong.

Figure 2. EUR / USD rate chart from August 2002 to June 2005. Each bar represents a week, not a day (as in chart 1). A completely different view emerges on this long-term chart – the uptrend remains intact, and any downward movement does nothing but create a starting point for new highs. Photo by Sabrina Jiang © 2020

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Some investors may wonder why we are using the 65 SMA. The real answer is that we got the idea from John Carter, a futures trader and educator, because those were the values ​​he used. However, the importance of the three SMA filters does not lie in the specific values ​​of the SMA, but rather in the interdependence of the short, medium and long-term price trends provided by the SMA. As long as you use sensible proxies for each of these trends, the three SMA filters provide valuable analysis.

If we look at the EUR / USD from two different timeframes, we can see how different the trend signals can be. Figure 1 shows daily price action in March, April and May 2005, showing volatile movement with a clear bearish bias. However, Figure 2 shows the weekly data for all the years 2003, 2004 and 2005 and presents a completely different picture. As seen in Chart 2, EUR / USD remains in a clear uptrend despite some very sharp corrections.

Warren Buffett, a famous trader known for long-term trend trades, has been harshly criticized for sticking to his enormous long EUR / USD position, which suffered some losses along the way. But if you look at the pattern in Figure 2, it becomes much clearer why Buffett might have the last laugh.

The three most liquid commodity currencies in the forex markets are USD / CAD, AUD / USD, and NZD / USD. The Canadian dollar is affectionately known as “Loonie”, the Australian dollar as “Aussie” and the New Zealand dollar as “Kiwi”. These three nations are great exporters of goods and often perform very well in synchronization with the demand for each of their major export products.

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For example, take a look at Chart 3 which shows the relationship between the Canadian dollar and oil prices. Canada is the largest exporter of crude oil to the US, and almost 10% of Canada’s GDP is accounted for by the energy mining sector. The USD / CAD rate is reversed, so the strength of the Canadian dollar creates a downtrend in the pair.

Figure 3. This chart shows the relationship between the loonie and the oil price. The Canadian economy is a very rich source of oil reserves. The chart shows that as the oil price rises, it is cheaper to buy US dollars to someone who owns the Canadian dollar. Photo by Sabrina Jiang © 2020

Although Australia does not have many oil reserves, the country is a very rich source of precious metals and the second largest gold exporter in the world. In Figure 4, we can see the relationship between the Australian dollar and gold.

Figure 4. This chart shows the relationship between gold prices and Aussie (in US dollars). Note how the gold boom from December 2002 to November 2004 coincided with a very strong upward trend in the Australian dollar. Photo by Sabrina Jiang © 2020

Which Are The Most Popular And Profitable Currency Pairs To Trade?

Unlike major and block commodity currencies which offer traders the strongest and longest trading opportunities, currency crosses offer the best trades in the range. In the Forex market, crosses are defined as currency pairs that do not include the USD as part of the pair. EUR / CHF is one such cross and is known to be possibly the best range pair to trade. One of the reasons, of course, is that Switzerland’s and the European Union’s growth rates are almost the same. Both regions have current account surpluses and stick to conservative fiscal policies.

One strategy for range traders is to define the range parameters for the pair, divide those parameters by the midpoint, and simply buy below the midpoint and sell above it. The parameters of the range are determined by the highs and lows between which prices fluctuate over time. For example, traders in the EUR / CHF range might set 1.5550 as the top and 1.5050 as the low range in the period May 2004 to April 2005, with a median of 1.5300 designating the buy and sell zones. (Look below).

Figure 5. Shows EUR / CHF (May 2004 to April 2005) with 1.5550 as the top and 1.5050 as the bottom and 1.5300 as the middle line. The range trading strategy is to sell above the median and buy below the median. Photo by Sabrina Jiang © 2020

Cross currencies are so attractive to a restricted strategy because they represent currency pairs from culturally and economically similar countries; The imbalance between these currencies is often counterbalancing. It is hard to imagine, for example, that Switzerland could fall into depression while the rest of Europe happily grew.

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However, the same kind of equilibrium trend cannot be observed for stocks of a similar type. It’s easy to imagine how General Motors, for example, could file for bankruptcy while Ford and Chrysler are still in business. Since currencies are macro-economic forces, they are not as vulnerable to micro-level risks as stocks of individual companies. Currencies are therefore much safer to trade in ranges.

Nevertheless, any speculation carries with it risks

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