Page 95 - Ultimate Guide to Currency Trading

Consequently, if there is an idea of a growing economy, the world's stock markets will go up in
value. The up and down motion of the world's stock indexes, such as the German stock index (DAX),
French stock index (CAC)40, London stock exchange (FTSE)100, and the Dow Jones industrial average
(DOW) 30, serves as a sort of proxy for how well the investors and traders think the world economies
are doing. Since most investors and traders look at the same charts and have access to basically the
same level of information, they will react to this information and these charts pretty much the same.
Remember, it takes quite a bit of force for the world's stock markets to fall (or rise, for that matter) by
a significant amount. It takes a large number of sellers of the options of the indexes and stock in those
indexes to sell off and make the price levels fall 2, 3, 4 percent or more.

If you sense through your readings and studying of the charts and news that the markets will
soon perceive that the economy is slowing, plan accordingly. You can set some long-term trades that
act as feelers of the market. You can set up some long EUR/SEK, or short AUD/USD, or even some long
USD/EUR, all trades that would benefit from a shrinking in the price levels of the world stock markets.

If the world's stock markets have been beaten up for a while, and you sense a
comeback in the markets, then you can be a contrarian investor and place some
trades that will react strongly to positive news when it comes. You have learned
Essential
some of the best trades for this type of market environment: go long on risk
currencies.

In order to learn to pick your own pairs you will need to look to go long in a higher-than
average-growth economy and go long that currency. Then you will need to pick a slower-than-average
growth economy and short that currency. This is the basic reasoning behind currency trading. It really
does come down to growth rates and the interest rates that are related to them. Everyone in FX is
reading the ticker, and looking for what is the next thing to happen to the interest rates of those
economies that have currencies that are traded. The only difference with one pair and another is
popularity, which in turn can add fuel to the fire of a carry trade or shorter-term trade.

For example, if two trades have good growth and slow growth parts to the trade, the most
popular one will most likely move higher and perform with more reliability, which in turn makes it that
much more popular, and then more and more reliable, etc.

If the same thing can be accomplished with a short USD and long South African rand as can be
done with a short USD and long Australian dollar, the AUD/USD trade will be the best one to get into
because there will be that many more other traders getting into the trade at the same level, and
seeing the same patterns as you.