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You should try to learn forex trading using a proven and tested forex system. Finding the right currency pair to trade should be of utmost importance to you as an individual trader. As an individual trader you will only have $1000 to $10,000 at the most as equity in your trading account. Opportunity cost is a real cost for most individual traders. Funds committed to anyone position are funds that cannot be used for in other possibly more profitable trades.
In forex trading, almost all the currency pairs are linked to one another, one way or the other. As an individual trader, if you only trade US dollar, you risk missing promising trades and opportunities offered by other currency pairs.
Most of the trading is done through the direct buying/selling of US dollar. You should always keep an eye on the crosses in order to gauge the strength/weaknesses of a currency. This will tell you which currency pair is the best to trade.
What are the crosses? Any currency pair that does not involve the dollar is known as a Cross such as EUR/JPY, EUR/AUD, CHF/GBP, EUR/GBP etc. Almost 90% of the currency pairs that are actively traded involve the US dollar. Simply put, over 90% of the all the currency trades have US Dollar on one side of the trade. So why trade a cross?
Let’s make it clear with an example. A good method to trade equities is to trade from big to small. Suppose, you determine that the stock market is bouncing and is expected to rise. But you have limited funds as an individual investor; so you should choose your stocks carefully.
It would be advisable to look at the sector specific indices and find the most promising sector. From there, you would look within the index and find the most promising companies that are expected to perform well over the coming months. This big to small thinking is very solid and you need to think in the same fashion while trading forex.
Cross movements should never be overlooked. Cross movements can often hide the footsteps of large players. A major investor may be bullish on Euro due to some fundamental reasons. He may try to fly under the radar and buy Euros against Swiss Francs, Pound Sterling, and Yen etc.
Crosses are extremely important to swing or momentum traders, they are used as forecasting tools to predict which currencies are leading the pack. Ignore the crosses and you will be stuck often with currency pairs that do not move at all.
With limited funds, you should always try to choose the currency pair that is expected to move the most. But, how exactly you come to a reasonable conclusion? By looking at the crosses!
Cross movements either work to amplify the move of a major currency pair or minimize the effects. For example, in EUR/USD, if Euro is dropping against US Dollar but rising against the Pound, the net effect would be to limit the size of the EUR/USD fall. If ERU/GBP is rising, it is telling us that the Euro is outperforming the British Pound.
Since you have limited funds, which currency pair to chose? Any EUR/USD selling pressure is likely to be offset by the rebounding cross EUR/GBP. GBP/USD sales will likely to be amplified by the cross sales EUR/GBP.
Since, EUR/GBP is rising; it is a better bet to short Pound instead of Euro. This means you should choose the pair GBP/USD. If we had randomly picked one of the two currency pairs for shorting, we may have missed a great trade.
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