Forex Lesson 6: Technical Analysis Revisited (2)

Noteworthy Points when Trading Currencies

Every currency pair trades in different ways and patterns depending on the currency pair involved. As such there are no hard or fast rules regarding currency trade patterns but there are a few general pointers and things to look out for when trading currencies that will help to make a more informed analysis of the pairs and the eventual trade that is placed on them.

The range or spread of each currency pair is different. A good way to recognise the spread or pattern of different currency pair is to look at 1-hour charts that cover a period of days or weeks. By looking at these charts the average spread of the currency pairs will become apparent. Some currency pairs such as the EUR/USD have an average daily spread of about 100 +/-pips whereas other more volatile currency pairs such as the GBP/USD have an average daily spread of approximately 200+/- pips.

Several factors may influence the spread of a currency pair. A good starting point is the interest rates of the respective currencies. Generally currency pairs with little difference between their current interest rates will have a smaller spread whereas those with a greater difference between their current interest rates will have a larger more volatile spread. The number of buyers and sellers affects the liquidity of a currency and also effects the spread. The more liquid a currency pair is the lower the spread is likely to be, this can be seen with the EUR/USD which is very liquid with a high volume of buyers and sellers. Currency pairs that are less liquid with fewer buyers and sellers tend to be more volatile with a larger spread, this is true of the GBP/USD.

There is no need to adopt different trading strategies when trading a currency pair that is more volatile. The methods of trading are the same irrespective of whether a currency pair is volatile or more stable. There will still be recognisable lines of support and resistance with the market either trending or being range bound. What it is worth remembering is that the currency pair is volatile and therefore could be more risky. To compensate for this it is recommended to take a smaller position, usually a third or half that of the position you would normally trade, when trading the more volatile currency pairs.

To conclude factors to be taken into consideration when trading currencies are the difference between the two pairs current interest rates, analysis of an hourly chart taken from a period of days or weeks and the liquidity of the currency depending on the numbers of buyers and sellers of the currency pair. Once the above steps have been taken the trader should have a good general knowledge of the currency pair being traded and be able to make a more informed trade.

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