There are various reasons why traders buy or sell a currency pair. Some do it for a fundamental reason. They suspect an economic news, like the GDP (Gross Domestic Product), or Retail Sales, or Jobs Data, will disappoint. Or, beat expectations.
Others do it because of macroeconomic differences. They believe an economy goes in the wrong direction. Or, it outpaces another one.
However, retail traders should look at both technical and fundamental factors before buying or selling a currency. But, statistic says something else.
Trading a Currency Pair Without Looking at a Chart
Retail traders come to the trading table with unrealistic expectations. They want to get reach fast. And, if possible, with not much of an effort.
Because of that, they end up taking unnecessary risks. They overtrade the account.
Those who understand the long run aspect of trading will always end up as technical analysts. They’ll buy or sell currency pairs based on technical analysis setups.
But this comes after a clear understanding or markets and how markets function and move. When reaching that point, correlations become obvious.
Two Majors and One Cross
The U.S. Dollar is the central piece in the Forex world. This should come as no surprise.
Our financial system is built on it. Since Bretton Woods, the dollar took the major role of the world’s reserve currency.
Many argue this is a burden for the U.S. economy. Others say it is a privilege. No matter your position, the role of the dollar becomes obvious on the Forex dashboard. It splits the currency pairs into two main categories: majors and crosses.
A major pair always has the U.S. Dollar in its componence. On the other hand, a cross doesn’t.
For every two major pairs, there’s one cross. Just look at the Forex dashboard and pick to currency pairs that have the U.S. Dollar in their componence.
Let’s say, USDCAD and GBPUSD. These are two major pairs. What is the name of the corresponding cross? You guessed: the GBPCAD cross.
The thing is that any one of these three currency pairs can be traded without looking at a chart. The only condition is to have an idea about where the other two go.
For example, if you have a bullish setup on both USDCAD and GBPUSD, guess where the GBPCAD will go? Hint: not to the downside!
Different Correlations to Consider
There are plenty of examples here. Financial products move in a correlated fashion.
The most notorious one is the CAD and oil correlation. This is a direct correlation, in the sense that they move in the same direction.
It is no wonder. The Canadian economy is a highly energy-driven one. As such, what happens in the oil market, moves the CAD currency.
As a rule of thumb, when oil falls, CAD falls too. Hence, the USDCAD pair, the most important currency pair, will rise.
Other correlations to consider: JPY pairs and global equities, USDJPY and DJIA, gold and AUDUSD, and so on.
Whenever someone tells you it’s not possible to open a trade without looking at a chart, remind them of the correlated nature of some products that make the financial markets.
Because of electronic trading and the way the financial system interconnects, a market (like a currency pair) moves based on the imbalances between the other two pairs that affect its liquidity.
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