SPOTLIGHT ON THE MARKETS: MARCH
Markets have their idiosyncrasies and distinct features just like the human beings who trade them (perhaps because of the human beings who trade them!) And, as with human personalities, some of these traits are inherent, long-standing ones while others fluctuate depending on external factors over a period of time.
This week we are going to look at the major currency pairs in the forex market and highlight the features of each pair as observed by one of our trainers.
Of all the major currency pairs, the EUR/USD is the most common and liquid market, thus tends to have the smallest spreads. The combination of liquidity and volatility makes the EUR/USD a good place to start if you’re new to forex trading.
The USD/JPY is the second most popular currency pair. When bullish, the USD/JPY tends to go up in small increments, but when it corrects it does so quite quickly, although it tends not to go too deep. Then, when price consolidates it can really slow down. This is all due to the fact that the USD/JPY typically sees relatively stable action throughout the trading day with few peaks and troughs.
The EUR/JPY has traditional patterns, for instance showing bullish and bearish flags. This pair usually behaves in a similar way to the USD/JPY but has been a little less predictable in recent times, presumably (to apply a little fundamental analysis to explain our technical analysis) because of the all uncertainty in Europe at the moment.
This pair—known as cable in the trading world—is typically very volatile, usually showing quite aggressive spikes, moving up and down quickly, and often moving 150 pips in one day.
The USD/CHF is inversely correlated to the EUR/USD, i.e. it moves in the opposite direction. But since this pair has larger margin requirements you might want to avoid it and simply use your observations of it to inform your trades on the EUR/USD (for example if your analysis would suggest you go long on the USD/CHF, you could short the EUR/USD). The USD/CHF also has a correlation to the gold market since the Swiss National Bank is responsible for managing Switzerland’s gold reserves.
The AUS/USD tends to follow the movement of the EUR/USD but makes smaller moves. If you are put off by the volatility of the EUR/USD, the AUS/USD is a good alternative because it doesn’t move as much or as fast. The AUS/USD also has a positive correlation to the gold market. This is because the US Dollar is considered the world’s “safe haven” currency. In periods of global uncertainty and unrest, the big hedge funds will tend to hedge into gold if they perceive a threat to the US Dollar, causing the AUS/USD to rise. However, that in itself carries its own risk. Never forget that there are no safe bets in trading!
The EUR/GBP is one of the slowest markets, so while it can be a good market to cut your teeth on when you’re starting out, because you’re unlikely to get any sudden shocks, it can get a little boring when you become a more experienced trader.
This is an interesting pair to trade because it has a strong correlation with the US Oil market. If you’re trading oil, it’s always worth analysing the USD/CAD at the same time, to see how the two inform each other. The Canadian dollar also has a positive correlation with the Australian dollar since both currencies are built around natural resource/commodity prices.
The AUS/JPY tends to be quite closely correlated to the US Equities Market and typically makes most of its movement during the Asian session.
Obviously these characteristics and correlations do break down occasionally (there are no guarantees in trading) so be aware of them but keep them in perspective. Don’t miss an opportunity by getting bogged down and distracted with analysing the correlations in the markets too closely. You are only taking a snapshot at any one time. Ultimately you should still follow your trading plan, utilise your indicators and enter on multiple confirmations, and maintain a healthy risk-reward ratio because money management is key. Never forget that you are a technical analysis trader; when you see a good set up, pull the trigger and take the trade. Don’t let your observations rule your life; let your indicators do their job!