There has been a lot written pertaining to the appropriateness of technical analysis trading in the currency markets. This may be true, but what it does is leave traders, especially those new to currency markets, with the idea that all technical tools are appropriate to all major currency pairs.
From the standpoint of profitability this is perhaps the most hazardous, as it could seduce traders into spending their time looking for the magic technical tool or study that will work with all types of currency pairs, every time.
The most actively traded currency pair is by far the euro/dollar (EUR/USD), accounting for 28% of daily global volume in the most recent survey done by Bank for International Settlements (BIS) on the currency market activity. EUR/USD receives further interest from the volume that is generated by the Euro-crosses; for example EUR/GBP, EUR/CHF and EUR/JPY, and this interest tends to be contrary to the underlying U.S. dollar direction.
For example, in a U.S. dollar-negative environment, the Euro will have an underlying bid that stems from the overall U.S. dollar selling. However, less liquid dollar pairs such as USD/CHF will be sold through the more liquid Euro crosses. In this situation this would result in EUR/CHF selling, which would introduce a Euro offer into the EUR/USD market.
The second most actively traded currency pair is USD/JPY, accounting for 17% of the daily global volume in the 2004 BIS survey of currency market turnover. Traditionally USD/JPY have been the most politically sensitive currency pair, with succeeding U.S. governments using this exchange rate as leverage in their trade negotiations with Japan.
China lately replaced Japan as the Asian market evoking U.S. trade tensions, USD/JPY still performs as a regional currency proxy for China and other less-liquid, highly regulated Asian currencies. USD/JPY is recurrently prone to extended trending periods as trade or regional political themes play out (i.e. yuan revaluation).
However, for day-to-day trading, the most important feature of USD/JPY is the heavy authority exerted by Japanese institutional investors and asset managers. As a result of a culture of intra-Japanese collegiality, incorporating strategy information-sharing and extensive position, Japanese asset managers recurrently act in the same direction on the yen in the currency market.
The two most heavily traded currency pairs were examined, now let’s look at two of the least liquid major currency pairs, USD/CHF and GBP/USDGBP/USD Goes Below $1.20, which involve particular challenges to technically oriented traders.
Today, USD/CHF trades are usually based on overall U.S. dollar feeling, rather than Swiss-based economic fundamentals. The Swiss National Bank (SNB) is mainly worried with the franc’s value in relation to the euro, because the vast majority of Swiss trade is with the European Union, and Swiss fundamental developments are mainly replicated in the EUR/CHF cross rate.
The Cable (GBP/USD), and sterling, suffered from fairly poor liquidity and this is partially because of higher pip value (U.S. dollars) and the comparative Euro-centric basis of U.K. trade. Often sterling shares the same types of trading characteristics of Swissy, which we already discussed, but in addition Cable react sharply to the fundamental data of the U.K. as well as to U.S. news.