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“cryptocurrency Pairs In Forex: Exploring Profit Potential In Australia” – The overall Forex market generally tends to be higher than the overall stock market. Why? The stock market, which is really a market of many individual stocks, is governed by the micro-dynamics of individual companies. The Forex market, on the other hand, is driven by macroeconomic trends that can sometimes take years to develop.
These trends are best manifested through major pairs and commodity block currencies. Here we take a look at these trends, examining where and why they are happening. Then we also look at what types of pairs offer the best opportunities for limit trading.
“cryptocurrency Pairs In Forex: Exploring Profit Potential In Australia”
There are only four major currency pairs in Forex, which makes it quite easy to follow the market. They are:
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It is understandable why the United States, the European Union and Japan would have the most active and liquid currencies in the world, but why the United Kingdom? After all, as of 2020, India has a larger GDP ($2.65 trillion versus the UK’s $2.63 trillion), while Russia’s GDP ($1.57 trillion) and Brazil’s GDP ($2.05 trillion dollars) almost match the total economic output of the United Kingdom.
The explanation, which applies to most of the Forex market, is tradition. Great Britain was the first economy in the world to develop sophisticated capital markets, and at one time it was the British pound, not the US dollar, that served as the world’s reserve currency. Because of this heritage and because of London’s preeminence as the center of global forex trading, the pound is still considered one of the world’s leading currencies.
The Swiss franc, on the other hand, takes its place among the top four because of Switzerland’s famous neutrality and fiscal prudence. At one time the Swiss franc was backed 40% by gold, but to many traders in the foreign exchange market it is still known as “liquid gold”. In times of economic turmoil or stagflation, traders turn to the Swiss franc as a safe haven currency.
The largest major pair – in fact, the single most liquid financial instrument in the world – is EUR/USD. This pair trades almost $1 trillion a day in notional value, from Tokyo to London and New York, 24 hours a day, five days a week. Both currencies represent the two largest economic entities in the world: the US with an annual GDP of $21.43 trillion and the Eurozone with a GDP of approximately $13,335.84 billion.
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Although US economic growth has been much better than that of the Eurozone (3.1% for the US versus 1.6% for the Eurozone), the Eurozone economy generates net trade surpluses while the US runs chronic trade deficits. The Eurozone’s superior balance sheet position—and the sheer size of the Eurozone economy—have made the euro an attractive alternative reserve currency to the dollar. As such, many central banks – including Russia, Brazil and South Korea – have diversified some of their reserves into euros. Clearly, this diversification process has taken time, as have many of the events or shifts that affect the forex market. This is why one of the key attributes of successful forex trend trading is a long-term perspective.
To see the importance of this long-term view, take a look at the figures below, both of which use a simple moving average filter (three SMAs).
Figure 1. Chart of the EUR/USD exchange rate from March 1 to May 15, 2005. Note that the recent price action suggests stagnation and a possible start of a downtrend as the three simple moving averages line up with each other. Image by Sabrina Jiang © 2020
The triple SMA filter is a good way to gauge the strength of a trend. The basic premise of this filter is that if the short-term trend (seven-day SMA), medium-term trend (20-day SMA) and long-term trend (65-day SMA) are all in line. direction, then the trend is strong.
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Figure 2. Shows the EUR/USD exchange rate from August 2002 to June 2005. Each bar corresponds to a week rather than a day (as in Figure 1). And on this long-term chart, a completely different picture emerges – the uptrend remains intact with each move down doing nothing more than providing the starting point for new highs. Image by Sabrina Jiang © 2020
Some traders may wonder why we use the 65 SMA. The real answer is that we got this idea from John Carter, a futures trader and educator, as these were the values he used. But the importance of the triple SMA filter lies not in the specific SMA values, but rather in the interplay of short-term, intermediate-term and long-term price trends provided by the SMAs. As long as you use reasonable proxies for each of these trends, the triple SMA filter will provide valuable analysis.
By looking at EUR/USD from two different time perspectives, we can see how different the trend signals can be. Figure 1 shows the daily price action for March, April and May 2005, which shows volatile movements with a clear bearish bias. However, Figure 2 presents weekly data for all of 2003, 2004 and 2005 and presents a very different picture. According to Figure 2, EUR/USD remains in a clear uptrend despite some very sharp corrections along the way.
Warren Buffett, the famous investor who is known for making long-term trend markets, has been heavily criticized for holding his massive long position in EUR/USD, which has suffered some losses along the way. Looking at the lineup in Figure 2, however, it becomes much clearer why Buffett may have the last laugh.
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The three most liquid commodity currencies in the forex markets are USD/CAD, AUD/USD and NZD/USD. The Canadian dollar is affectionately known as the “loonie”, the Australian dollar as the “Aussie”, and the New Zealand dollar as the “kiwi”. These three nations are outstanding exporters of goods and often tend very strongly to match the demand for each of their main export commodities.
For example, take a look at Figure 3, which shows the relationship between the Canadian dollar and crude oil prices. Canada is the largest oil exporter to the US and almost 10% of Canada’s GDP is made up of the energy exploration sector. USD/CAD trades inversely, so the strength of the Canadian dollar creates a bearish trend in the pair.
Figure 3. This graph shows the relationship between the price of oil and the price of crude oil. The Canadian economy is a very rich source of oil reserves. The chart shows that as the price of oil rises, it becomes less expensive for a person holding Canadian dollars to buy US dollars. Image by Sabrina Jiang © 2020
Although Australia does not have many oil reserves, the country is a very rich source of precious metals and is the second largest exporter of gold in the world. In Figure 4 we can see the relationship between the Australian dollar and gold.
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Figure 4. This chart looks at the relationship between Aussie and gold prices (in US dollars). Note how a rally in gold from December 2002 to November 2004 coincided with a very strong bullish trend in the Australian dollar. Image by Sabrina Jiang © 2020
In contrast to major currencies and commodity blocks, both of which offer traders the strongest and longest trend opportunities, currency crosses represent the best limited trades. In forex, crosses are defined as currency pairs that do not have the USD as part of the pairing. EUR/CHF is one such combination and is known to be perhaps the best pair to trade. One reason is, of course, that there is very little difference between the growth rates of Switzerland and the European Union. Both regions have current account surpluses and adhere to conservative fiscal policies.
One strategy for range traders is to determine the range parameters for the pair, divide these parameters by an average line, and simply buy below the average and sell above it. Range parameters are defined by the high and low level between which prices fluctuate during a given period. For example, in EUR/CHF, range traders could, for the period between May 2004 and April 2005, place 1.5550 as the top and 1.5050 as the bottom of the range, with an average line of 1.5300 delimiting the areas of buying and selling. (See below).
Figure 5. This EUR/CHF chart (May 2004 to April 2005), with 1.5550 as the top and 1.5050 as the bottom of the range, and 1.5300 as the median line. A range trading strategy involves selling above the average and buying below the average. Image by Sabrina Jiang © 2020
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Remember that range traders are direction agnostic. They just want to sell relatively overbought conditions and buy relatively oversold conditions.
Cross currencies are so attractive to the range-limiting strategy because they represent currency pairs from similar cultural and economic countries; Therefore, imbalances between these currencies often return to balance. It is hard to fathom, for example, that Switzerland would go into a depression while the rest of Europe merrily expands.
However, the same tendency towards equilibrium cannot be said for stocks of a similar nature. It’s easy enough to imagine how, say, General Motors could file for bankruptcy even as Ford and Chrysler continue.
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