Match-Maker Trading – Marrying the Strongest and the Weakest
Once a trader has learned the basics of the currency market – regardless of their style of trading - whether it is technical or fundamental, the rationale to marry the strongest and weakest currency is obvious.
News, technical levels, and sentiment all play directly into price. By observing the most recent movements in price – we can determine how exactly that sentiment is being priced.
Because there are two parts to a currency pair (The Base Currency being the first listed currency/ The Counter Currency being the second) deviations taking place in one pair can be looked at on other pairs with the same currency.
For example – if AUD/USD is screaming to the upside, and USD/CAD is also screaming to the upside – and astute trader would know that they could take AUD (which is getting stronger as AUD/USD goes up) and CAD (which is getting weaker as USD/CAD goes up) and marry them together in the AUD/CAD currency pair to potentially take better advantage of these moves.
To perform strength analysis is relatively simple. We simply want to take the one consistency amongst the major and commodity currency pairs – and eliminate it. What are we left with?
A clean reading on the value of each currency individually can be desirable for a number of reasons. While denoting strength doesn’t necessarily include any assurances that that strength will continue – it at least lets us know what is playing out currently.
We can compare the amount the following pairs have went up:
AUD/USD
And then we can compare the amount these pairs have went down:
USD/CAD
The one rule when performing this analysis is that we want to be 100% sure that we are comparing the same time-frame or period so that we can make a ‘Apples to Apples comparison.’
By running this very quick analysis – we can get an idea for which of these currencies we may want to buy – and which of these currencies we may want to sell.
Lets say, for instance, that on a given morning the Euro was displaying the most weakness – and the Aussie was displaying the most strength?
Well – we could sell EUR/USD and buy AUD/USD – but we would still be limited by the performance of the US Dollar. But then we would have 2 separate trades to manage, and those trades would individually perform based on the USD.
Another option – perhaps more convenient – would be to Sell EUR/AUD. That way – you’re selling the weakest currency at the moment (EUR) and your buying the strongest (Aussie).
If you'd like to find out more about strength analysis, please don't hesitate to let us know at Instructor@DailyFX.com.
