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Guest Commentary: Looking for a Currency to Trade Against? Opposites Attract

By Yohay Elam
06 December 2012 00:00 GMT

Traders who are trading the news or fundamentals usually develop a strong sentiment towards a specific currency: they are either bullish on this currency or bearish on it – they want to go long on the currency or short.

Yet as every coin has two sides, also a currency pair involves two sides. So, which currency should you trade against? The answer also depends on the direction your currency is going.

In general, if you want to go long on one currency, you should find a weak currency to trade against it. For example, in recent weeks, the euro has strengthened. If you were buying on the euro, it would have been better to sell the yen, as the Japanese currency has been retreating. This is a path of least resistance. EUR/JPY made bigger gains than EUR/GBP for example, as the British pound also enjoyed some strength.

And when you have a bias against a specific currency and want to go short on it, you should find a strong currency to trade against. For example: selling the US dollar would not have been that successful against the yen as it were against the euro or the Canadian dollar for example.

Also here, the idea is to match the opposites, sell a weaker currency against a stronger one, and buy a stronger one against a weaker one.

What about trading the news? In this case, you are waiting for the outcome of an economic indicator that will either push the relevant currency higher or lower. The resulting trade could also depend on the outcome: a positive outcome would trigger buying the currency in question against a weaker one, while a disappointing outcome would result in selling the currency against a stronger one.

For example, the recent Australian decision had two scenarios: one for a fall of the Aussie: (buying GBP/AUD) and another for a rise of the Aussie (buying AUD/JPY).

What do you think? How do you match currencies?

Further reading: 5 Most Predictable Currency Pairs

By Yohay Elam, ForexCrunch

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06 December 2012 00:00 GMT