This article looks at the foreign exchange rates and how to find the best currency pair.
The trading that you complete on the forex market is based on the foreign exchange rates. All the trading is also done with currency pairs. When you trade on the foreign exchange rates you need to consider which currency pairs you will be trading. There are some that are more commonly traded than others. However, you should also consider the pairing of strong currencies with weak to create the best currency pairs to trade with.
Strong and Weak Foreign Exchange Rates
The first point that you need to consider would be what makes a strong currency and what makes a weak currency. There are two ways that you can judge this and each way will affect the trading that you are doing in a different manner. The first way is to look at the interest rates of the currencies. The second way is to look at the amount of trading that is done on the currencies.
Looking at the Interest Rates
The first way that you can pair strong and weak currencies is by the interest rate that they have. When you do this you will be able to make extra income from your trade based on the carry trade interest. To do this you will need to have a currency pair that offers one high interest rate currency and one low interest rate currency.
It is important that you consider how big the difference between the interest rates should be. The larger the difference in the rates the more you are going to make when you trade. Of course, this will only work if you are holding the high interest rate currency. If you hold the low interest rate currency then you are going to lose money through the carry trade.
It is very easy to find the interest rates of the different currencies. You can look at the central bank website or simply search for this on a search engine. It is important that you find out the current interest rates and not the historical ones.
Looking at the Trading
Another way to link strong and weak currencies is through the amount of trading that is done with them. The stronger currencies will be the more commonly traded currencies and the weaker ones are usually the more exotic currencies. The amount of trading will affect the fluctuations and the strength of the movements.
When you look at this you need to know about the commonly traded currencies. There are 7 commonly traded currencies, but you have to determine which ones will work best for you. Some of these commonly traded currencies are better for range trading and others for trend trading. You need to match the currency you use with the trading that you are going to be completing. If you do not then you will not be getting the movements that you need to trade with.
One problem with the pairing of currencies in this manner is that it will not always work. The strong currency will not always be the one that drives the movements of the pair. You need to consider this when you look at the movements of the different currency pairs.