When trading currencies you should be careful as well, currencies are traded in pairs. For example, when you buy USDJPY you are actually betting that the U.S. dollar will go up relative to just the Japanese Yen. If good news comes out for the Yen it’s likely you will lose money. Had you bought USDCHF and good news came out about the Yen you would not have lost money.

My point is that when you are bullish on the U.S. dollar its very important to consider the currency you choose to be bearish on; otherwise you may miss a great opportunity even though you had the right idea.

For example, lets say last week after G7 you decided to be short U.S. dollar. You see that the U.S. dollar is already much lower against the Yen, Euro, Sterling, and Aussie – but not Canada. So you sell USDCAD assuming your getting a bargain rate.

Over the next 48 hours USDCAD went up 2% and you got smoked. During the same time period the USD went down against all the other currencies mentioned. You were correct in your assessment that the U.S. dollar was a sell; you were wrong in your assessment that the Canadian currency was a buy.

The bottom line is that every foreign exchange trade is really two bets. Your betting that the currency you buy is strong and/or the currency you are selling is weak. Furthermore, as a general rule, if you want to buy USD, sell the currency that appears to be the weakest on the day against the USD. This would be the complete opposite of bargaining hunting and believe it or not it’s the right thing to do.

To be clear I am not suggesting you sell USDJPY after a sharp 100 point down move because it’s strongest against the USD. What I am saying is that if USDJPY is down 20 points on the day and USDCHF is up 10 points on the day, and you decide to sell U.S. dollars – selling USDJPY has been statistically proven to be better than selling USDCHF – given their relative movements against the USD on the day.

Many traders incorrectly surmise that if the USD goes down, the USDCHF will catch up with USDJPY. That’s incorrect logic. The fault lies in not considering that selling USD is only half the trade, the currency you bought is the other half.

Look at it this way. It’s not exactly the same but close. When the #1 rated woman’s tennis player takes the court she is expected to win; more so when she plays an unranked player than when she plays a top 10 player.

Note:

Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures  Hanover, Paribas, European American. www.EurUsdTrader.com