Choosing your Counter Currency
In this video, Roger Hawes, an Analyst from the Corellian Academy, discusses the importance of choosing the right counter currency when trading Forex CFD trading.
Throughout the video Hawes emphasized that preparation is the key to successful CFD trading, and part of this preparation involves choosing a trade idea and determining what currency will be the counter currency in a Forex CFD pair.
That being said, a base currency is a currency being traded, while a counter currency is a currency you exchange it for. The base currency is illustrated by an example using the British Pound. As other factors should be considered, the US dollar, which is commonly used, isn’t always the best default counter currency since it can significantly impact the outcome of a trade.
Furthermore, there are several factors to consider when choosing a counter currency in foreign exchange CFD trading.
In order to make a profitable trade, it's important to assess the relative strength of the counter currency compared to the base currency.
In addition, traders may want to avoid currencies that are overwhelmingly favored by the market based on market sentiment. Traders may also want to take into account factors such as interest rates, central bank policies, and geopolitical events and should also evaluate the volatility of different currency pairs according to their risk tolerance.
It is also important to keep in mind the fact that trading approaches can be affected by the differences in margin requirements between pairs. Overcrowded positions may require a reconsideration of the chosen counter currency to achieve well-informed trading decisions.
As outlined, selecting a currency pair is a personalized process based on your trade idea, market conditions, and risk tolerance. Diversification can act as a risk management strategy if you cannot decide on one currency or market pair.
After making a decision, Hawes mentions that traders can execute trades and maintain vigilant monitoring, being ready to cut losses if the market moves against their trade idea.
In conclusion, the main takeaway from this video is that choosing the right counter currency is a critical aspect of Forex CFD trading. It involves analyzing multiple factors to make an informed decision, and it can have a substantial impact on your trading results. Traders should not default to the US dollar but carefully evaluate the best counter currency for each specific trade idea.
