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While deciding which currency pair to trade, many traders make the mistake of forming their opinion around only one currency in the pair, ignoring the other currency. Right choice of the currency pair is essential for making profitable trades.

US Dollar is the most important currency in the global economy. It is heavily traded against other currencies like Euro, British Pound, and Yen etc. Many trader trade currency pairs involving USD. They make the mistake of only studying US Dollar while ignoring the other currency in the pair.

This neglect of the second currencys economic conditions can greatly hinder the profitability of the trade. This neglect also makes the odds of a loss high.

When you trade against a strong economy, the chances of failure are more. The weak currency in the pair could flop badly while the strong currency in the pair may appreciate more than what you calculated.

While choosing a currency pair to trade, one should study the economies of both the currencies. Finding the strong economy/weak economy pairing is the best strategy to use when maximizing returns.

For example, when FED announced its intention of containing inflation in March 22, 2005 FOMC meeting; most of the other currencies tanked against the dollar. A string of other positive economic data also reinforced the dollar.

When the initial reaction was over, GBP rebounded and recovered its strength, due to the impressive economic growth of British economy at that time. However, Yen kept on depreciating due to the week performance of the Japanese economy during that time. Dollar gained more than 300 pips in two weeks against the Yen during this time.

You can see that the USD strength had a much higher impact on the struggling JPY as compared to the consistently strong GBP. Trading USDJPY would have been much more profitable as compared to trading USDGBP.

While choosing a currency pair, study the economies of both the currencies in the pair. You also must examine the behavior of the various crosses. In brief, your best choice should always be the strong economy/weak economy currencies.

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