Pair a strong currency against a weak one
|One of the key trading principles is to look to pair a ‘strong currency’ against a ‘weak one’. In doing this you are stacking the odds in your favor of your trade going in your desired direction.
So, how do you define a ‘strong currency’? A strong currency is one that has specific reasons for its strength. Here is a recent example. Let’s say that there is a +1.73% spike in the oil market on supply concerns. Which currency would that benefit? Well, it would benefit countries that export oil. e.g Canada and Norway. In this instance, we would expect CAD and NOK strength.
Now, what about a weak currency? Well, a weak currency is a currency that has specific reasons for its weakness. Let’s take another example from recent news and imagine that a number of Bank of England members are releasing news comments which indicate that they are in favour of rate cuts. When a bank cuts interest rates the value of the currency goes down. So, in this instance, we would have our ‘weak’ currency, the GBP.
Continuing to use this hypothetical example you can see we now have a ‘strong’ and a ‘weak’ currency. This would give us bias for trading the GBP/CAD or the GBP/NOK Short. Any retracements on these pairs would be potential areas to short from.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.