Assume you have decided to buy the GBP/USD and have the following information to help you in your analysis: After all a currency may be overbought (strong) or oversold (weak) but how strong is strong, and how weak is weak.Ĭonsider this for a moment. Equally for the US dollar, if it is sold universally in pairs such as the USD/CAD, the USD/JPY and others, then we can assume that the GBP/USD is rising as a result of strong buying of the pound universally, and strong selling across the market of the US dollar.įinally, we come to the third problem, which is trying to assess the strength of this buying or selling. If it is, then this is clearly a sign that the UK pound is being bought universally in the market. If the GBP/USD is bullish once again, is the British pound strong against all the other major currencies, such as the GBP/JPY, the GBP/CAD, the EUR/GBP etc. To compound this problem, every currency can be bought or sold against a myriad of other currencies. If this ‘pair’ were rising, is this being driven by strength in Google or weakness in Amazon? Almost impossible to analyse. Imagine if we had to do the same thing trading stocks for example. If the GBP/USD for example is bullish, is this being driven by strength in the pound, or weakness in the US dollar. Each position is a judgment of the forces driving two independent markets. Of all the four principle capital markets, the world of foreign exchange trading is the most complex and most difficult to master, unless of course you have the right tools! The reason for this complexity is not hard to understand.įirst currencies are traded in pairs.
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