A trader can find a wide range of currency instruments in the trading terminal and it can be challenging for him/her to choose an asset for trading, since, apart from the individual preferences, he/she shall take into account specific features of the currency pairs. So, how to select an asset for trading? Are there any "features" (peculiarities) pertained to a specific currency pair? Let's examine this issue more closely, as it is extremely important for successful trading in the Forex market.
Features of various kinds of the trading instruments
First of all, a trader shall know that currency pairs are divided into three groups:
- Major pairs;
- Exotic pairs.
The first group includes seven financial instruments and accounts for over 70% of all trading operations in the Forex market. Therefore, major currencies are considered the main trading assets. The key currency participating in all major pairs is the USD. It is the base currency of three pairs - USD/JPY, USD/CAD and USD/CHF.
Such quotes are called direct, since the USD is the first currency in the pair. In the other four pairs - GBP/USD, EUR/USD, NZD/USD, AUD/USD, the USD acts as the second currency and such quotes are called indirect. The presence of the US currency in the pairs suggests that they may be affected by US political and economic news.
Note that a trader who wants to trade successfully shall create his/her strategy not only on the basis of the technical analysis, but also with the account of the news included in the economic calendar.
Cross-pairs include currencies other than the USD, such as GBP/CHF, EUR/JPY, EUR/GBP, etc. Some of them are as popular as the major currency pairs, due to their high volatility; others are less popular among traders. Since cross rates are of great importance for the commercial and industrial operations, exchange rate in the pair can be affected by the economic data of the countries of currencies represented in the pair For this reason, this group of instruments is recommended for trading by the experienced traders who can understand and adequately interpret macro and micro-economic data.
The third group includes exotic currencies, such as USD/RUB, EUR/DDK, USD/MXN, etc. They represent the ratio between the major currencies from the first group and the currencies of the developing countries, such as Hong Kong, Singapore, South Africa, Russia, ect.. Exotic currencies are not widely used for trading because of the large spread and small trading volumes. Note also that price movement in such assets can be often unpredictable or their prices can be kept in control by the government. For all these reasons, exotic currencies are traded mostly by traders from the countries of these currencies.
Volatility of the currency pairs
It is obvious that volatility in each currency pair may vary. Volatility is the range of price movement within a specific time period. If we make an analyses of the market, we will see that within one day some pairs move by hundred of points, while others can stay in flat for weeks. Wide range of shows that volatility of the instrument is high; in case of the narrow range, volatility is low. On average per day, the range of price fluctuation of four-digit quotes is 50-100 pips. However, some currency pairs may move by 200-300 pips. This is a very strong movement and if a trader manages to seize the moment, he/she will make good profit.
We do not recommend the beginners to start trading the instruments with the high volatility, such as the British pound sterling. In the first group this currency is represented in the pair GBP/USD. Note also that in the cross-pairs, such as GBP/CHF, GBP/JPY and GBP/AUD, changes in price can be even more drastic. For a beginner it is better to start trading the currency pairs with the lower volatility, such as EUR/GBP and EUR/CHF. Later, after gaining some experience, a trader can use for trading currency pairs USD/JPY, USD/CHF or EUR/USD, etc.
Specifics of the currency pairs
In order to make the right choice of a trading instrument, it is necessary to examine all the factors, which may affect currency pairs. These factors can be subdivided into three groups: important news on 1)politics, 2)economy and 3)so-called "bad" news (the news about terrorist attacks, natural disasters, military operations always weaken the currency of the country, in which this event took place).
Working with a particular currency pair, a trader shall pay attention to the main political news of the countries, currencies of which a trader uses for trading. It's no secret that politics and finance are closely related; therefore the release of important political news can have a strong impact on the exchange rates.
As an example we can review the situation in Eurozone in June 2015 when politicians failed to resolve the problem of Greek loans until Greek government announced possibility of withdrawal from the European Union.
This news caused the collapse of the Euro against other currencies.
We can see that on 29.06. 2015 the currency pair EUR/JPN opened the day with a gap of 320 points and then fell by over 100 points within two hours. Finally, European politicians came to an agreement with the Greek government and the market gradually recovered.
Another important political event, which is worth mentioning, is the referendum on the UK’s exit from the European Union. Referendum results showed that major population of the country voted for the termination of the country’s membership in the European Union. This news had a drastic effect on currency pairs with the GBP. In the pair GBP/USD, the pound fell by more than 1800 points within a few hours. The currency pair GBP/JPY collapsed by almost 3000 points on this news.
Economic events have even stronger influence on the currency pairs; therefore, economic calendar contains every day data on the state of economies of the countries of the major currencies, such as the USD, Euro, British pound, Swiss franc, Japanese yen, Australian, Canadian and New Zealand dollars. The key indicators, which affect exchange rate are:
- Inflation rate;
- Unemployment rate;
- Changes to the number of employed;
- Interest rates;
- Retail sales volume;
- Other indices.
Analyzing the data on these indicators, a trader can choose appropriate trading strategies, using to his/her advantage high liquidity of the currency pairs and the rise in movement after the publication of the news. Let’s review some examples.
On 15.07.2015 the news on the number of unemployed in the UK has been released. According to the predictions of the most analysts, the number of applications for unemployment benefits should have decreased; however, in reality, it turned out exactly the opposite: instead of the expected reduction in the number of applications to -8.8K, their number has grown to 7.0K. The increase in the number of applications for unemployment benefits is the negative news for the British pound. That is why, the price of the currency pair GBP/USD fell sharply after the publication of this data.
The decline in the pound has continued for four hours, giving traders an excellent opportunity for using the decline to their advantage.
On 04.06.2015 the news on retail sales volume in Australia has been released. Analysts expected the increase in volume up to 0.4%; however the news became a big surprise for them, as actual volume was at the level of 0.0%. Retail sales data shows availability of money of the population. If people actively buy goods, turnover of retail sales increases indicating that people have money and country’s social life is improving. If this index goes down, the situation is the opposite, as the people buy less and commodity turnover decreases, which has a negative impact on the exchange rate of the national currency.
After the release of this data the price changed by 65 points! The effect of the news lasted only for 10 minutes and the main price movement took place in the first five minutes!
The chart shows strong decline in the pair at the time of the news release. However, only traders who were at the terminal at this very time managed to make money on this decline, as the strong movement in the pair lasted only in the first ten minutes and after this the pair has been in flat.
On August 27, 2015, the data on the US gross domestic product was released. This is a quarterly macro-economic indicator, which shows the value of all goods and services produced and provided in the United States. The rise in GDP shows economic growth in the country, while the decline in this indicator shows economic regression. So, the data released on that day showed that GDP was at the level of 3.7%, which was the rise of 1.4% compared to the previous value of 2.3%. The data caused dramatic rise in the USD against the Euro:
The chart shows sharp decline in price at the time of the news release, which lasted for four hours. It was just the period when a trader could make profit by opening short positions on this currency pair.
We can also recall the day of January 15, 2015, when the Swiss Central Bank announced that the franc would not be pegged to the Euro any more. In the result of this news, the Swiss franc has strongly increased against the other currencies. If you look at the currency pair USD/CHF you can see that the price has grown by almost 3000 points:
However, this news was only short-term effect. In two months, the price of franc returned to the value it had before the decision of Swiss Central Bank.
It may sound strange but in some cases even the weather can affect the price movement in the pair! It refers to the currencies of countries producing agricultural products. For example, if there is a drought in Australia or New Zealand, the projections for poor harvests will weaken national currencies of these countries.
A trader shall also take into account the prices of the main commodities of these countries, such as gold and oil. The rise in price of gold often indicates possibility of the rise in the Australian dollar and Chinese yuan (after all, these countries are the world's major exporters of this precious metal), while the Canadian dollar is tied to the cost of oil.
In summary, let’s determine what are the most important features, which a trader shall take into account. It may seem unexpected but the most important features in the behavior of the currency pairs are those, which have been detected by a trader personally and which he/she can successfully use in trading. Of course, a trader shall consider the opinions of the market experts but it is of no less importance to use one’s own wits in order to create a strategy with the account of specific features of the currency pairs!
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.