Taming the volatile Australian Dollar – A great currency for beginner forex traders
You have your trading plan, your brokerage account is open and you’re excited to get started. The next step is picking the right forex pair to focus on.
Each forex pair has its own personality, with different market and economic forces at play in each market. Some pairs have a tendency to make clean-trending moves, while others tend to be more range-bound.
The Australian Dollar – AUD/USD – is a common starting point for beginning Forex traders. This market has a reputation for having friendly price action, and provides quite frequent trend-following opportunities.
About the AUD
The AUD is considered a commodity currency, due to Australia being a major exporter of products such as iron ore and wheat – this means the AUD price action is greatly affected by moves in the commodities markets.
The AUD is also extremely sensitive to economic growth and demand from China – Australia’s largest trading partner. China’s economic boom over the past decade was a large factor in pushing the AUD/USD up to a peak of around 1.10 in 2011.
With China’s slowing growth over the past few years, the AUD has gradually dropped to the low .70 area – this multi-year movement has provided a great long term trend-following opportunity for traders looking to short the AUD – this means placing a trade, looking to profit from a drop in the currency.
Trading Tips
The AUD has the reputation of providing clear price action, with the tendency for smooth trends, especially over the past few years. Here are some basic trade set-ups to look for in trending markets:
Pullbacks to the moving average
The pullback is perhaps the most classic of trading set-ups. A pullback set-up occurs when the market is making a move in one direction, then “pulls back” in the opposite direction – effectively setting up for the next leg in the overall trend.
Many traders look for the market to pull back to their chosen moving average, before opening a trade. For example, the 200MA is pointed downward, the trader could wait for the market to pullback to the 200MA before opening a short-trade position.
Breakouts
A breakout trade occurs when the market pushes through a previous key level. For example, if the market has turned around at a certain level – when the market approaches this level in future, and is able to push through it, this is considered a breakout.
A breakout is perhaps the simplest way to get on a trend following trade, but there is always the risk of no follow through occurring after you enter the trade – many traders manage this risk by combining multiple set-ups.
Movingaverage crossovers
The moving average crossover signal is a very systematic trade set-up where a shorter-term moving average (e.g. 20MA) crosses from one side of a longer-term moving average (e.g. 50MA) to the other, indicating a potential trend in that direction.
Most forex traders look for a combination of trade setups or signals before entering a trade. For example, a trader may wait for a moving over crossover to occur, and then start watching the market closely, looking to enter on a pullback to the moving average.
AUD/JPY – Profiting from the carry trade
The carry trade is a slightly more advanced trading strategy. This is where a trader sells a currency with a relatively low interest rate and simultaneously purchases a different currency with a higher interest rate.
A trader using the strategy, captures the interest rate differential between the two currencies – depending on the amount of leverage used in the trade, the differential can add up to a substantial dollar amount – deposited into the trading account each day, just for holding the position.
The Australian dollar currently has a globally-high interest rate of 1.75%, while the Japanese yen sits on the other side of the scale with a globally low interest rate of -.1%. This creates a situation where the AUD/JPY is a favoured currency pair for forex traders focused on a carry trade strategy.
The real benefit of this strategy is captured when a trader looks for long-bias trade set-ups – allowing for profits from the movement of the AUD/JPY, as well as profits from the interest rate differential All charts are courtesy of CMC Markets Australia.
Understanding the Currency Pairs in Forex Market
There are many concepts you need to understand to make money in Forex. One of them is the concept of currency pairs. All the trades that are placed here are for making a profit and if you do not know the right pair for your investment, you will lose the money. There are many types of pairs and each pair has their advantage and disadvantage. This article will give you an idea of the currency pairs and also try to answer if the major currency pairs can bring more money to traders. It is commonly believed among them that if they can trade with a popular currency, it will give them more volatility and they will have chances to make more money. This article will try to explain if that really happens in Forex.
The basic structure of the Forex market
Before you start your journey you need to understand the basic structure of the Forex market. First of all, learn about the technical factors so that you can find decent trade setups in the higher time frame. But understanding the technical factors is not enough. Fundamental analysis is the second most important type of market analysis and you need to use the fundamental data to analyze the strength of the market trend.
Once you have mastered the two major types of market analysis, it’s time for you to start using the demo trading account. Consider the demo trading platform as blessings since you can easily develop your trading skills without losing any real money. Being a new UK trader, you should focus on the major pairs only. Some traders often prefer cross pair trading but this is extremely risky. Most of the time, wild spikes and random movement in the price are more prominent in the cross pairs. So it’s a must to develop a clear idea about the currency pairs to develop your skills.
The major pairs
The most popular pairs in Forex are the major currency pairs that have been paired with the US dollars. A popular example of this major part is the EURUSD, the most traded pair in Forex. It is also because it offers the most liquidity. The easy way to know if a pair is a major is by looking at the other currency that it is paired with, if there is no US dollar, it is not a major currency pair. Most traders trade with the major pairs as they are traded all over the industry. You will find also much information because they are popular.
The minor currency pairs
If the pair has no US dollar in it, it is a minor currency pair. They are less trade than the majors because they are less popular. One of the reasons is dollar is the most widely accepted currency in the world. Their price is always stable and it gives the trader the chance to make money with volatility. The minor currency pair does not have a dollar and the prices change. It makes the trends volatile and the traders do not get the profit as they have planned.
Are major more profitable than minors?
This question makes sense when we look at the chart. Most of the traders like to wait for a trend that appears with a major pair. They know the pair is combined with the dollar and it makes it stable in volatility. This gives them hope and increases the confidence that they can make money. They can be profitable as there is more information online and you can know about them, you can understand them easily but that will not help you to bring profit if you do not plan a good strategy. Even traders with minor currency pairs can make a profit with a good plan. Leave this thought out of your mind and you will find there are more ways to make money than by trading with major pairs.
