Currency Basket Forex StrategyTake advantage of basket allocation to hedge against losing pairs.
Selecting Your Forex Basket Pairs
It helps to know the basics of currency pair quotation rules. Without over complicating the topic it is enough to know that the first component of the currency pair matches the direction of the trade, while the second component is the opposite of the trade direction. For example:
- Buy EURUSD – equates to buying the EUR and selling the USD
- Buy USDJPY – equates to buying the USD and selling the JPY
- Sell EURJPY – equates to selling the EUR and buying they JPY
Knowing the above notation rules will assist in the directions that you will take with each currency pair in your basket as well as understanding what is moving a currency pair when combined with currency correlations and currency strength.
Which Direction – Buy or Sell?
Direction selection is assisted by taking into consideration currency correlations, currency pair strength and the individual currency components strength which make up the currency pair. Keeping in mind the entire time that we are trying not to hold too much of one currency and instead maintain a balance.
Currency Pair Correlations
Currency pairs often correlate either negatively or positively. For example, most of the time the EURUSD and USDJPY correlate highly negative. That means that when the EURUSD is increasing the USDJPY is decreasing.
Using our triad basket of the EURUSD, USDJPY and EURJPY we can use the notion of currency correlations to our benefit and it’s in a way that may not be so obvious. If the EURUSD and USDJPY maintain negative correlation, somewhat in balance, then we can expect the EURJPY to move sideways and with little volatility. A trade may be taken on the EURJPY in either direction using our Dynamic Money Manager.
Currency Strength Trading
Continuing to trade our triad of the EURUSD, USDJPY and EURJPY while applying our Currency Strength Meter we can wait for the ultimate position and that is when the EURUSD and USDJPY are no longer negatively correlated, but instead are positively correlated. When this happens it is best to trade the cross in the same direction. This can be done with any trial of three currencies and can be very powerful.