Forex – Forex Killer – eBay – Sky High Auctions – Succesful Online Businesses and other money making opportunities. » How Can I Choose The Best Currency Pair For Trading?

The choice of the right currency pair in Forex trading is very important. Many traders make the mistake of shaping opinion around only one currency, ignoring the other currency in the pair.

Most of the trades involve US Dollar as either the base currency or the counter currency. Many traders make the mistake of only studying the economic factors that have the potential of affecting dollar.

In the Forex market, this neglect of the foreign economic conditions can greatly hinder the profitability of the trade. It also increases the odds of a loss. You need to understand a little bit of fundamental analysis when you make your choice of the currency pair.

When trading against a strong economy, the chances of failure are more. The weak currency could flop badly while the strong currency may appreciate more than you calculated.

While choosing a currency pair to trade, one should study the economies of both the currencies. Finding the strong economy/weak economy pairing is the best strategy to use when maximizing returns.

For example, when FED announced its intention of containing inflation in March 22, 2005 FOMC meeting; most of the other currencies tanked against the dollar. A string of other positive economic data also reinforced the dollar.

When the initial market reaction was over, GBP rebounded and recovered its lost strength, due to the consistent economic growth shown by the British economy at that time. However, JPY kept on depreciating due to the week performance of the Japanese economy during that time. Dollar almost gained more than 300 pips in two weeks against the Yen after March 22, 2005.

It is apparent that USD strength had a much higher impact on the struggling Yen as compared to the consistently strong GBP. Trading USD/Yen would have been more profitable as compared to trading USD/GBP.

While choosing a currency pair, study the economies of both the currencies in the pair. You also must examine the behavior of the various crosses. In brief, your best choice should always be the strong economy/weak economy currencies.

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