One of the things that will make you a better currency trader is to learn the personalities of the different pairs that you are trading. If you are a parent then you will understand this lesson very well. Each of your children have a different personality type, don’t they? Each of them responds differently to different situations… If you are a parent then I know that you know this to be true. If you are an experienced parent then you know how to work well with each of your children’s personality types.
In a similar way currency pairs each have their own personalities. They respond differently to different types of clinical events and news events. They also respond differently to the change and value of their correlated currencies. I want to help explain some of this so that you can go deeper in your knowledge and experience with the Forex markets. I want you to be able to read a currency pair’s movements better so that you can make better trades and have more success as a Forex trader.
Why Different Currency Pairs Move in Different Ways
Each different currency type interacts with the other in different ways. And each of the currency pairs are influenced by different political events, news releases and also goods/material/financial trading between different global market centers.
The most common currency traded is the United States is dollar, also known as USD. When it comes to trading volume, the currency most frequently traded in relation to other key currencies in the global market is the U.S. dollar.
At first glance you might fall into the trap of thinking that each currency pair moves the same as the others. After all, when you open a chart, and arrange a number of different pairs on the chart, you will notice that the prices are all moving. They are moving up and down, some faster than others, but each in a certain way. Depending on how long you have traded, have you noticed how the EURUSD and USDCHF pair move in almost identical patterns, but yet in reverse? I’m sure you will notice it if you look at it now. Go ahead an open up the two pairs with hourly charts and you will see what I mean… this is just one of the clearest examples of how the study of the relationships and ‘personalities’ of difference currency pairs can help us as traders.
Each currency pair has its own unique personality. They do not all move with the same characteristics. They are not all influenced by news releases in the same way. They do not respond to each other in the same way as well. They each seem to move according to their own ‘personalities.’ This is what I am referring to as “currency personality traits” and is the subject of this article. I feel that studying the way each currency pair moves and fluctuates will help you to become a better trader. Just as you have gotten to know your spouse and each of your children very well, and you know how they will typically react under different circumstances, so you can learn also how each currency pair is likely to respond at different times and under different circumstances.
Ways in Which News Announcements Influence Currency Pairs
When it comes to trading personalities, most of the major currency pairs are affected by certain circumstances, and possibly the largest of these influencing factors are news releases. These news releases happen at different times of the day that typically in the morning of the time zone in which they are released. For example, if the news release is from the Bank of Japan then the news release will typically come out during the morning hours in Japan. Using sites like ForexFactory.com and DailyFx.com can help you to be aware of when different news releases come out. I recommend that you research these sites and others too and find the right one for you to help you track these daily news announcements.
Note: Not all news announcements come out during the morning banking hours. Some of the most important releases will come out, for example, during the early-afternoon hours of the US market. It is usually a good idea to start each trading day with reviewing the high impact news events for that day and making note of the ones that could influence the currency pairs that you trade.
Breakdown of a Few Major Currency Pairs
The EUR/USD pair is in a privileged position, because of the fact that these two zones are the most developed ones, from an economic standpoint. The Euro is part of the world’s most significant currency bloc, among USD and JPY, having a great deal of influence over the global asset allocations. Moreover, after the U.S. dollar, the Euro is the most vital reserve currency, responsible for almost 60% of the composite USD index. While the EUR/USD pair does take into account European interest-rate changes, as well as economical developments or downfalls, the Euro is second fiddle to the U.S. dollar, which is the driving force behind the currency pair. This means that traders need to carefully analyze both sides of the pairing when it comes to game-changing stories, in order to understand its roots.
No other currency pair can surpass the EUR/USD liquidity, which is also expanded to “crosses”, which are non-dollar rates, like EUR/CHF and EUR/GBP. Moreover, these crosses become more-liquid crossed, thanks to the less-liquid currency pairs containing the U.S. dollar, like GBP/USD and USD/CHF. With the strengthened liquidity, positions are able to be easily closed or opened, with minimal spreads, giving short-term traders the chance to trade them with relative ease.
One challenge, however, is that the EURUSD can also be something of a wily pair and can be difficult to trade profitably. Because it is one of the most ‘active’ pairs in terms of trading volume, this seems to be where most new traders begin their journeys. Also there is an attractiveness because of the generally low spreads on the EURUSD, which can get as low as 0.0 pips with some brokers. This fact alone makes entering into trades very attractive for many traders. Additionally, traders with larger accounts and the need to open large trades find the liquidity of the EURUSD pair attractive because it means they can easily get their orders filled, even with very large orders (this too, however, will depend also on the broker).
Completing the Bermuda triangle of trading is the USD/JPY currency pair, which is ranked second amongst active trading. The USD/JPY pair has a complicated political history. The amount of trade volume with Japan has been fluctuating in recent years and so its importance is not what it once was. But it is a scenario which the Yen is still in a favorable position, acting as a bridge with the US and other Asian nations. Trading with China has started to come into play in recent years, but the volume is still very low. The Singapore Dollar has also increased greatly in trading volume compared to years past.
While in regards to economics, one would assume that the Bank of Japan (BOJ) is the most relevant governmental institution, the truth is that the Ministry of Finance (MOF) has an even bigger influence on the currency values in Japan. To achieve the desired economical reconstruction, the MOF in collaboration with the BOJ, lobbied hard in the currency market for the yen, spending countless amounts of money, supporting the greenback and reducing the yen value.
To figure out why the USD/JPY currency pair is so influential, all it takes is a look at the country rankings when it comes to investment rate and domestic savings. Surprise-surprise, Japan tops both these lists, thus bringing in huge financial investments scattered worldwide. The Yen is often times viewed as a safe-haven currency, similar to the Swiss Franc in such ways. But this demand for the ‘safe-haven’ does fluctuate and the value of the Yen can swing widely in one director or the other.
Note: You will often see the Yen move in tandem against its major pairs: USDJPY, EURJPY, GBPJPY and even AUDJPY and CADJPY. Usually when there is a move on the Yen, it will be the same type of move against all Yen pairs.
GBP/USD Strengths and Weaknesses
What do you get if you take a currency with low liquidity and large points and pair it with the USD? Headaches, of course. This problematic currency is the pound, which many traders avoid because of its instability. Before the Euro became a household name in 1994, only three currencies (GBP, NZD and AUD) had their values denominated in USD. This resulted in risky and costly pound movements, which prevented the currency from gaining any dominance on the market.
Because of the unreliable nature of the currency, the pound often takes the lead when it comes to significant USD moves, violating certain technical levels ahead of the EUR/USD pair. This means that even the traders who don’t have the slightest interest in dealing with the currency, still need to monitor it in order to predict how the EUR/USD rate will act.
This is a wonderful example of how one strong currency pair can affect many others. If there is a strong move on the British Pound against the US Dollar, for example, this can send the value of the US currency down which will in turn affect many of the minor pairs that the US trades against, like the NZDUSD, again, for example. So what you will see is a move precipitated by the British Pound/GBP which in turn affects the US Dollar which in turn can affect the minor US-pairs—in this example, the New Zealand Dollar NZD. If you pay attention to the high impact news releases you will have a better feeling for the pulse of the market as you watch the interaction of the ‘major players’ – that is, the major currency pairs like the US Dollar, the British Pound, the Euro, and the Yen.
Another Example of Currency Correlation and Influence
To better understand the concept, here is another practical example. Let’s say the U.S. dollar has a downfall, influenced by negative news. On the other hand, the Euro and Pound reach higher levels and because the pound has a resistance level similar to the Euro, we can assume that the Euro will behave the same way. Because of the fact that the Pound market is not as deep as the Euro one, we can actually anticipate the move of the Euro based on how the Pound also fares. Therefore, even if the Pound follows through or maintains its level, it’s a strong indication that the Euro will copy its movements too.
The pound is very one-sided. It doesn’t play well in pairs, nor does it have too many aces up its sleeve to compensate for low liquidity. While the EUR/USD currency pair offers traders several opportunities to enter on retracement, the pound doesn’t usually offer as good of opportunities (though the market is always fluctuating and what holds true one year may vary to the next). That’s why when dealing with this currency GBPUSD, a certain level of aggressiveness is required, as well as quick reactions to enter on the first valid signal, instead of hoping for a pullback and better entry later.
Apart from the aggressiveness, dealing with GBPUSD also requires a good sense of anticipation, since in non-trending markets, the currency often experiences/shows false breaks. This gives traders the opportunity to place stop-loss orders in the neighborhood of major technical levels but also presents difficulty when trying to trade GBPJPY breakouts.
We can argue all day about volatile and low liquidity currencies, but pretty much everybody agrees that the Swiss Franc has some special advantages as a currency in-and-of-itself. It has an honorable place among the big players, thanks to Switzerland’s state of affairs and banking laws. Approximately one third of the worldwide private assets found their home there. Famous for its well-grounded privacy laws and neutrality, the currency is like a refugee camp for traders, since unlike the U.S. dollar and other currencies, it barely gives traders reasons to worry.
In a time where there is political uncertainty everywhere and almost every breaking news event has the potential of drastically influencing currencies, the Swiss franc is like a breath of fresh air (in some ways). The Swiss National Bank (SNB) is the institution a trader would certainly want to monitor, thanks to the currency’s bond with the Euro and the trades with the Eurozone.
At first glance, the Swiss franc seems to follow the pound’s footsteps, but the Pound is nowhere near the Swiss franc’s volatility. The Pound is too often influenced by UK-specific news, while the Swissy has a bit less movement after such. It rather behaves similar to the EUR/USD pair. This similarity is often seen as a mirror opposite, however. It is fascinating to see the way the EURUSD and USDCHF dance together.
Similar to the pound, the Swissy barely has any pullback and moves with the somewhat erratic movements, a scenario mostly preferred by those traders who are quick to react and like to scalp or trade with larger stop-loss levels. The USD/CHF pair will often exhibit false breaks, forcing traders to configure order levels in a way similar to the Pound. While the USD/CHF liquidity is below average, traders who enjoy trading this pair are able to still get good moves. For those watching this pair, always keep an eye on the news announcements from the US, from any country in Europe and also on the news releases in England.
In a Nutshell
There are several factors which influence the currency markets, such as time zones, liquidity, news event reactions and market evolution. While there isn’t a mold for us to be able to exactly determine how a currency is going to behave, analyzing specific characteristics of the currency pairs brings us one step closer to successfully anticipating its movements. A skilled trader will be capable of differentiating one currency from another by paying attention to traits that stand-out and coming up with appropriate trading strategies for each pair.
You may or may not have noticed that a trading strategy that works well on one currency pair may not work as well on another. This is just the way things are and we as traders do not have a ‘holy grail’ that will work under all market conditions and on all currency pairs. Use these lessons though to gain more perspective on your trading and try and keep the ‘personalities’ of each pair in mind as you trade.
How Will You Apply This?
I do not know how many currency pairs you’re trading. I also do not know what your experience has been to date. If you are a beginner then I will suggest to you to observe one currency pair in particular. Watch only one pair at a time as you’re learning your system. This takes a ton of discipline, but it is worth it. Your goal, if you are a beginner, is to master your trading system. Do not be concerned about necessarily learning each currency pair, or even one or two, in the beginning. The very best thing you can do is to master your trading system. Until this is done, nothing else matters.
But if you have already learned your trading system, then what are you doing to really learn the different currency pairs that you are trading? You might be looking at the majors all at one time and this is fine to do. But the challenge with this approach is that it can be more difficult to learn the personalities of multiple currency pairs at one time. This is the downside. The advantage, however, is that you can see how the different pairs interact with each other as you study and trade, and this is important too.
Remember, nothing can replace raw trading experience. The more you trade, the more you will learn and the better you will become as a trader overall. Becoming a professional trader is not an overnight leap, but rather takes years of experience and disciplined effort. Do not give up if you are new and feel like you just can’t make any headway. Continue on slowly but diligently and your experience will begin to grow as will your successful trades. Use what you have learned here with the currency personalities to help you make better trades along the way.
Please let me know if you have enjoyed this article and if you would like to read any more about different currency pairs and their typical habits.