Currencies and currency pairs are at the heart of Forex trading. Speculating on their moves results in a profit or a loss.
Based on their risk profile, traders are conservative (only take a position when both technical and fundamental analysis points to the same direction, they look for confirmation before defining a pattern) and aggressive (tend to pick potential tops and bottoms, look for non-conventional things, like time, when entering a trade), but, in essence, they are doing the same thing: buying or selling a currency pair in order to make a profit.
Exactly how this profit is realized, is less important. The means to reach it are secondary.
Experience traders that fully understand how the Forex market functions and how currency pairs are organized in the Forex dashboard, know that a trading decision (the decision to open or close a trade, or to buy or sell a currency pair) can be made without even looking at a chart.
Yes, it is possible to buy or sell a currency pair without opening a chart. And not because the trade is based on fundamental analysis, on a specific piece of economic data. It is because of the way the Forex dashboard is organized.
The world's reserve currency is the U.S. dollar. This means that the financial system as we know it right now is based on the U.S. dollar.
If you are from Australia, for example, and want to buy a house in Germany, you can't do that unless you pay for it in U.S. dollars. What does this even mean, as we all know that the Australian currency is the Aussie dollar, while in Germany the currency is the Euro.
The explanation comes from the way the financial system is built. Your Australian bank will pay for the house in Germany with your Aussie dollars balance, but what it is actually doing is buying U.S. dollars and then with those dollars is paying for the house in Germany, in Euros.
The commercial bank, your bank, suddenly is part of the foreign exchange market and it just cleared some dollars for your transaction. This is how important the U.S. dollar is.
If you have a trading account with any broker, the dashboard shows all the available trading instruments: currency pairs, CFD's, indices, commodities... everything. There is one thing that is omnipresent, though: the U.S. dollar. As a rule of thumb, any currency pair that has the U.S. dollar in its componence is called a major pair. The most popular currency pair of them all, and the most liquid one too is the EURUSD. It is a major.
Other examples are GBPUSD, USDJPY, AUDUSD, USDCHF, USDCAD and NZDUSD. A major pair reflects the differences between the American economy and the other major economies in the world.
Any other currency pair that doesn't have the U.S. dollar in its componence, is called a cross. Funny enough, majors and crosses can be grouped together, and traded accordingly.
Some brokers are further dividing the Forex dashboard into minor currency pairs, exotics, minor crosses, major cross, etc., but the truth of the matter is that the main classification and the most important one is referring to the U.S. dollar. A cross is always moving based on the differences between the two major pairs it represents.
Is it possible to buy or sell a currency pair without looking at a chart? And yet to buy it for technical reasons, not fundamental ones? The answer is yes.
The EURGBP cross, for example, like any cross, is moving based on the differences between the two majors it represents: the EURUSD and the GBPUSD. If the EURUSD and GBPUSD are making identical moves, the EURGBP is said to be flat, or, is not moving at all.
This is how currencies are organized on the dashboard: two majors and one cross. No matter what is the currency your looking at, if you pair it with the U.S. dollar, a major pair will result, if you pair it with other currency, a cross pair will result.
Majors and crosses are moving differently, and have different liquidities, spreads or costs associated with their trading. The EURUSD, for example, is the most liquid currency pair of them all, while the NZDCAD is not that liquid. Large volumes will be difficult to be traded on the NZDCAD cross without a big slippage or other associated costs. It is not the same in the case of the EURUSD.
Coming back to the EURGBP example, if one is bullish or bearish on the cross, and wants to buy it or sell it, the next thing to do is to chart one of the two related major pairs: the EURUSD or the GBPUSD. One is enough for making a trading decision.
If the GBPUSD is bullish as well, what is the currency pair that must be bought? The EURUSD. Why?
When the EURGBP is bullish and GBPUSD is bullish too, the one pair that should travel the most and be the most aggressive in doing that is the EURUSD. The EURGBP cross can only move based on the differences between the EURUSD and GBPUSD.
A bullish GBPUSD and EURGBP setup will result in an extremely bullish EURUSD. If there is a trading decision to be made, the right one will be to buy the EURUSD, not the EURGBP or the GBPUSD.
And this is coming as a result of analyzing the EURGBP and GBPUSD, remember? This is the classical example of how to buy or sell a currency pair without analyzing it, and it works every time.
When opening a trade, the broker blocks a margin in your trading account. That margin acts as a collateral for the trade.
By the time the trade is closed, the margin is released. Therefore, it is important to think twice where do you invest your available margin: it should be in a currency pair that travels the most, the fastest, and with little or no drawdown for the trade.
