by Grace Cheng
When I first started out in forex trading a few years ago, I was greeted with a wide selection of dollar-based currency pairs and crosses which do not involve the U.S. dollar as the base. At that time, there was not much information about the various pairs, and so I decided to first demo day trade on the four Majors, which are namely, EUR/USD, USD/JPY, GBP/USD and USD/CHF, in addition to other common crosses.
As you can see, all of these Majors involve the U.S. dollar. What I noticed was that each pair has its own personality, and you really need to know them well enough. It is not enough to just know their own quirks; you also have to adapt your trading strategies to tailor to each one for maximum success.
So if you are new to forex trading or if it seems that your trading system doesn’t seem to work well for all the different pairs that you are trading, then this article should be of interest to you. Since most traders would look to the most liquid currencies in the foreign exchange market, I will share with you some observations I have made with regards to the characteristics of each Major pair.
EUR/USD is the most liquid currency pair, accounting for 28 percent of daily global turnover in the triennial Bank for International Settlements (BIS) survey of currency market activity carried out in 2004. This is perennially one of my favourite pairs to trade because of its small pip spread of around 3 pips (which is determined by how liquid a pair is) and smoother movements.
The Euro is known to be anti-dollar since it moves in contrary to the underlying U.S. dollar direction. If the market is overall bearish on the U.S. dollar, the Euro will have an underlying bid resulting from overall U.S. dollar selling.
I have observed that the average daily pip range for EUR/USD is 100 pips, and its slow movement relative to the other major dollar pairs is due to an antagonistic selling of the EUR/CHF cross in the face of U.S dollar selling when traders wish to bypass other dollar pairs like the USD/CHF. Thus, EUR/USD is an ideal pair for short-term traders who are averse to jerky movements.
I have also found that EUR/USD has an intimate relationship with USD/CHF and GBP/USD. USD/CHF tends to be negatively correlated to EUR/USD whereas GBP/USD tends to be positively correlated to it. I like to look at the charts of USD/CHF and GBP/USD to form a much clearer picture in my mind, especially when EUR/USD is approaching levels of support and resistance. By seeing if these pairs bounce off or break out of the equivalent technical levels, I can expect a predictable outcome for EUR/USD. Refer to the two charts below to see the correlated moves between EUR/USD and the other two pairs.
5 min chart of EUR/USD on one screen
5 min chart of USD/CHF and GBP/USD on another screen
Usually, EUR/USD has a lagging effect with respect to these two other pairs, but sometimes, it can take the lead, and when that happens, you will have to decide which technical levels among the three pairs matter the most. This can be influenced by imminent economic releases or strong psychological levels.
You will usually not miss much action if you don’t monitor the market during the Asian session because the movements of EUR/USD tend to be the most active and volatile during the European session between 0700-1700 GMT. From my observation, it moves an average of 80 pips during the session, and may be due to a lot of position reshuffling among the big players at this time prior to the opening of the U.S. market. The high volatility within this period is suitable for traders who are more risk-tolerant, and there is plenty of opportunities to enter the market.
The second most liquid currency pair is USD/JPY. USD/JPY tends to act as a regional currency proxy for China and other less-liquid Asian currencies. As a result, USD/JPY is frequently subjected to prolonged trending periods as geopolitical or trade risks surface. There are two things I have noticed about USD/JPY: one is that I am able to exploit its prolonged trending phase by buying at trendline/price support and selling at trendline/price resistance; second is that when I trade breakouts, they are often true and sustained ones.
Daily chart of USD/JPY
As we can observe in the chart above, a rising trendline has been drawn from May 2005 to around April 2006, and within this period, the three up-arrows indicate bounces off the trendline. The downside breakout that occurred in April 2006 is indicated by the down-arrow, showing a strong sustained breakout.
The reason why USD/JPY tends to experience fewer false breakouts is because of the clustering of Japanese institutional orders around similar technical or price levels. For example, big-sized offers at a resistance level will need to be absorbed if that level is to be broken. This is likely to happen only if a larger market move is unfolding, and this suggests that the breakout is more likely to be sustained. Hence, USD/JPY is ideal for breakout traders who employ entry orders on breaks of trendline or price support or resistance
The Japanese Yen is particularly susceptible to talks surrounding the Yuan revaluation, and tensions between Japan and North Korea. As a net exporter, Japan competes heavily with China. China’s artificial suppression of the Yuan has forced Japan to intervene by artificially depreciating the Yen many times in history. Revaluation would be significantly positive for the Yen, and hence negative for USD/JPY.
I usually trade USD/JPY during the Asian session between 2400-0900 GMT, where it moves an average of 90 pips, providing risk-tolerant day traders with high profit objectives. USD/JPY tends to move in quite an orderly manner during the Asian and European sessions if there are no economic releases or comments from government officials
Cable, as this pair is known, is one of the most liquid currencies in the world, attributed to the United Kingdom’s highly developed capital markets. When I first started out demo intraday trading with Cable, I had my worst losses with it, especially with breakout trades. It is definitely one of the most volatile pairs among the majors. The movements of this wild horse can be best described as jittery and jerky, making false breakouts of technical levels common. It is not unusual for these stop-loss driven false breakouts to trade 15-25 pips through a support or resistance level before reversing direction. Cable tends to move more quickly through support or resistance levels compared to EUR/USD, and usually without much retracement, if any.
Since then, I only trade Cable when I see opportunities for position trading, when technical or fundamental trends suggest a possible large movement in price is likely to occur, but which may not be fully played out for several weeks or months. I do not recommend short-term trading of this pair for newbies due to its inherent volatility, as they will tend to get whipsawed very frequently. From the chart below, we can see the two arrows indicating false breakouts within a day, and the overall jerkiness of the pair. The false upside breakout traded 9 pips above the resistance level, whereas the false downside breakout traded 22 pips below the support level.
5 min chart of GBP/USD
GBP/USD has historically been an attractive currency pair to go long for carry trades due to its relatively higher interest rate differentials. However, since the start of 2005, the Pound has been suffering from volatile down moves as speculators rush to exit their long positions due to rising interest rates by the US Federal Reserve. Although GBP/USD is more liquid than the EUR/GBP cross, the latter is usually the leading indicator for GBP strength. This is because Britain’s primary trade and investment partner is Europe. As a result, movements in the EUR/GBP cross can affect GBP/USD, and vice versa.
From my observation, GBP/USD is the most volatile during the European session between 0700-1700 GMT, with an average range of 100 pips. This is ideal for risk lovers since higher volatility translates to higher profit potentials even though the probability of being stopped out is quite high if you have very tight stops.
Swissy, as this pair is known, is one of the least liquid currencies among the majors. One of the important characteristics of the Swiss Franc is its undisputed safe-haven currency status due to its political neutrality as well as its famous privacy laws of its banking system. I’ve found that Swissy is quite similar to GBP/USD in terms of volatility and liquidity. Like Cable, it is more prone to false breakouts and tends to move quickly through support or resistance levels without much retracement, if any.
When trading it, you have to decide extremely fast and be quick in placing entry stop orders for breakouts, especially if you are the sort who usually prefer to wait for retracement before getting into the trade. What I do to sieve out higher probability breakouts is to base my trades on either hourly or daily charts instead of anything in a shorter time frame.
The EUR/CHF cross tends to be more liquid than Swissy, and it is preferred among the professional traders or market makers who wish to deal in the Franc. In fact, USD/CHF is generally a synthetic currency derived from EUR/USD and EUR/CHF. When I trade Swissy, I like to look at charts of both pairs to get an idea of where the Swissy is heading for. That said, Swissy tends to be a leading indicator when it comes to major dollar moves.
Hourly charts of USD/CHF (top) and EUR/USD (bottom)
The chart above shows that USD/CHF has tested the resistance level several times (indicated by arrows), and finally breaks above (indicated by vertical line), whereas EUR/USD still has not tested its support level at the time when USD/CHF breaks out (indicated by vertical line). This suggests that EUR/USD is very likely to test its support and possibly break below it soon. This also illustrates how Swissy tends to lead the move ahead of EUR/USD.
The Swiss Franc moves primarily to U.S. data rather than its own domestic economic data, unless talks of hiking interest rates within Switzerland surface to sway its direction. With regards to the Franc’s safe-haven status, the European Union has increasingly pressured Switzerland to relax its privacy laws and to increase transparency of its customers’ accounts. Right now, both parties are still under negotiations, but any changes in banking regulations by the Swiss will definitely have an impact on the Franc.
Intraday traders should note that USD/CHF is the most volatile during the European session between 0700-1700 GMT, with an average range of 100 pips. This again is ideal for risk lovers since higher volatility gives rise to more entry points and higher profit potentials.
Adaptation Is the Key
As you can see, each pair really does have its own behavourial traits. Of course there are many more traits and influencing factors to each pair than we could cover here. With enough trading experience, you will uncover more of these yourself. Armed with this knowledge, you can better appreciate each pair, and increase your odds by anticipating and outsmarting the market with unique technical strategies.