Know Your Currencies

In the forex markets, it’s worth knowing the characteristics of the currency pairs, since each of them exhibit distinct identities. Most of the currencies exhibit similar movement patterns, which can help a trader confirm price movements. One such close relation can be found between the EUR/USD & USD/CHF.

The price movements of these two currency pairs are absolute mirror images. In short, they have an inverse relationship. If Eur/Usd is rallying, then Usd/Chf should have downward movement, and vice-versa.

The following chart has a comparative price movement of both these currencies, and this inverse relation can be seen very clearly

how does one take advantage of this?

The most obvious fact is that one must not trade both the currencies at the same time. If one is long the Eur/Usd, logically one should not be long the Usd/Chf at the same time, since the Usd/Chf would have a downward movement.

And…neither is it advisable to take opposing trades on these two pairs, because if the trade goes wrong, then the trader would incur losses in both the trades.

Ideally, one should trade either of the two pairs. The best way to take advantage of this fact is to cross-check a trade by looking for confirmation factors on the other pair. If a trader is planning to take a long position in the Eur/Usd, he can look for a similar short setup on the Usd/Chf. If such an opposite setup is present in the Usd/Chf, it only adds further credence to his long Eur/Usd trade.

There are other currency pairs also which exhibit a close relation. Another fact is that each currency has an approximate Average Daily Trading Range (also known as the ADR), which it follows in the normal course of the trading day.

While this is not written in stone, it serves a good thumb rule to estimate the movement of the particular currency. Thus it is worth studying these relationships…to gain a higher edge in the market. Sometimes it is this basic knowledge, which can be the dividing line between success and failure.