In every form of sport, there are fans that support different contenders or teams. Over time, these fans gradually learn about what teams are better or worse compared to their favorites. If these fans were to place a bet on the game, they would obviously place a bet for their team whenever they are playing against a weaker team as their chances of winning would be higher.
This is true of any form of contest be it in war tactics, or in a game or even in the trading markets. As a result, in the context of the forex market, then your greatest chance at winning would be when you pair weaker currencies with stronger ones.
Maximizing winning probability with currency pairs
Every trade in the foreign exchange market takes place with constant deals taking pace with various currency pairs. In other words, a forex transaction takes place with respect to how well one currency is performing against the other.
For example, say you are following the currency pair USD/EUR. This currency pair would demonstrate how USD has been performing against EUR. If the value of USD rises in comparison to EUR, this is a very good time to sell your order and make profit with the difference in your buying price.
The reverse is true when EUR performs well in comparison to the USD. So, you buy when the price is low and sell when the price rises. Since the forex market is designed in a way that one currency has to beat the other, you can increase your probability of winning by pairing a strong currency with a weak one.
To help identify such pairs, you can get help from the economic data available for each country. This data acts like a scorecard for each country and the higher the score the better the economy of the country and a lower score indicates economic instability or poor economic performance.
For the sake of safety it is always a good practice to trade with the currencies of only those countries that are economically stable or their economy doesn't fluctuate instantly. Also, the fact that the economic data of the countries that are popular in the markets are released everyday, gives you a much clearer picture of strong and weak pairings.
The economic data has a greater significance over the global financial scenario than being a mere guide to traders in the market. Every report that indicates a stronger financial situation for any given country could lead to increased rates for that particular currency from the central bank.
This would increase the yield of the currency under question. Similarly, whenever a country reports weak data, the central bank cannot increase the interest with ease as this can make the situation worse. In certain cases when the data is extremely poor, the central banks may decrease the rates to act as an economic stimulus.
This is also one of the major factors that drive the forex markets as it increases the yield and increases the demand for a particular currency.
Interest rates and currency pairs
Interest rates also play a major role in choosing currency pairs to trade within a forex market. Looking at the financial data available for a particular country, you can determine how to pair stronger currencies with weaker ones by looking at the interest rate trajectory for the currencies.
As a result, you will be able to find the trending currencies based on what each country is doing and this can create fluctuations that can make certain currencies more desirable.
For example consider the currency pair EUR/GBP. This pair has been considered to be a currency pair that is sensitive to range. In 2006, the pair broke out on the upside. This is because, the central bank of Europe has started increasing the rates as Europe was performing well on the economic front.
This increased the yield of EUR and transformed the range bound pair to a trending pair for sometime. Strength and weakness of a currency can last for a significant amount of time. In such as situation, pairing a stronger currency with a weaker currency is one of the easiest ways to increase your profits in the forex market.