Trading forex is a challenging endevour as there are many factors that you need to be aware of simultaneously. When you are trading currency pairs, you are betting on one country’s currency strength versus another country’s currency strength. With the majority of currency trading, you are focussed on a particular currency and the US dollar.
It is extremely important to be aware of major news announcements that come out during the trading day which affect the currency you are trading and especially the US dollar.
Another factor to be aware of is “risk on, risk off”. There are days when people are wanting to take on “more risk”, these are the days when they stock markets are going up. You can look at the SP 500 or Dow Jones Industrial Average to get a feel for whether investors are taking on risk or taking off risk. How it has been for the last few years is that in the times when the stock markets are selling off, the US Dollar becomes stronger. You can think of it as people are selling their stocks, more US dollars are flooding the markets. This may change in the coming years especially if the US dollar loses it’s status as the reserve currency.
Generally on the days when the stock markets are going up and investors are taking on risk, the Euro/USD, GBP/USD and AUS/USD will also go up. On the days when the stock markets are going down the Euro/USD, GBP/USD and AUS/USD will also go down. This is a general statement as there are other factors which will influence like major news announcements. For the AUS/USD pair which is known as a “commodity pair”, it’s very influenced by the price of Gold. Likewise the other major commodity pair, the USD/CAD is influenced greatly be the price of oil.
These factors are important to take into consideration. It’s a very good idea for many strategies to have an overview of what is happening with the US Dollar Index which measures the strength of the US dollar versus the EUR, JPY, GBP, CAD, CHF and SEK. A large part of the weighting of the US Dollar Index (USDX) is with the EURO. One strategy that can be used in trading the Euro is observing the US Dollar Index in realtime as it tends to be a mirror for the Euro. Notice when the USDX is at support and resistance levels.
Keeping these factors in mind can give you an edge in your forex trading.
