If a forex trader knows what makes currency pairs move, then they can start to cash in on the movement cycles in the highly liquid spot forex market. In this article we will show traders all of the reasons that cause movement of currency pairs. Without movement, currency traders cannot profit.
Currency Fundamentals Makes Pairs Move
Over the long term cycles and trends, the interest rates or direction of interest rates will cause currency pairs to develop long term trends and move in one direction. The pairs with the biggest interest rate differentials between the two currencies would be the best choice for buying or selling. Currency interest rates for both currencies in any pair would be great information to have.
For example if you wanted to buy the USD/JPY pars, you would want to know the USD interest rates as well as the currency interest rates for the JPY. Since most traders focus on the eight most liquid currencies we would advise knowing the current interest rates and also the direction of interest rates for these currencies. Central banks publish this data. Forex fundamental analysis and knowledge of world interest rates trading is one approach to finding currency pairs that move.
Currency Strength Causes Movement
Over the short term having one currency strong and one weak in the same pair will cause the most movement in real time, or over the course of a few days. This is called currency strength trading. In the short term what causes a currency pair to move? Currency pairs move for one simple reason. One currency is strong and the other currency in the pair is neutral or weak. Here are some examples:
The EURUSD is a popular pair for spot forex traders, so let’s use this pair for an example pair to illustrate this concept.
If the EUR is strong and the USD is neutral or weak, the EUR/USD movement will be much stronger, and traders can take advantage of this.
If the EUR is weak, and the USD is neutral or strong, the EUR/USD average daily movement will be strong and this pair will move down, and traders can also take advantage of this.
The average pip movement per currency pair is not nearly as important as knowing if one currency is strong or weak on the same pair. Traders can use these simple concepts to make pips every day, because this is what causes currency pairs to move. These simple concepts work for any pair. Since most traders only trade a few pairs, this opens up a lot of opportunities to make move pips by choosing a pair to trade that fits these basic conditions across the most popular 28 different pairs.
See below a real time forex indicators called The Forex Heatmap® that uses currency strength to tell traders what is the best pair to trade with consistent strength in one direction. It works for 28 pairs.
The average daily pip movement forex is somewhat meaningless. What matters is that if one currency is consistently strong and one currency is consistently weak on the same pair. In this case you will always have big movement cycles and have a chance to capture those movements. The fluctuation of two currencies against each other in the same pair is what you need to know, not the average daily pip movement.
The Forexearlywarning trading system uses these currency strength concepts across 28 pairs, and almost all of them have good liquidity and low spreads in the main trading session, so all of these pairs are great candidates for trading.
Some traders say that supply and demand will ultimately impact the price movement. We know this has to be true but the currency supply and demand on the two currencies in a pair will ultimately be reflected in the prices, which is measured by the heatmap in real time. Trend tools like moving averages are price based, so ultimately whatever factors affecting demand and supply of currency will eventually show up in the short term movements and long term trends in the market. Trend indicators are discussed below.
Capturing Strong Currency Pair Movements
As a trader your objective it to capture strong movements on currency pairs when they occur. This means that you must have some professional forex alert systems at your disposal to notify you of when the market starts moving. This would include Metatrader 4 alarm systems, audible price alerts, forex news calendar, and currency strength alert systems available to you. You can learn more about these professional forex alert systems in this article.
Market Trends are Also Important
Traders can also use market trends to help them determine why certain currency pairs are moving. Using forex market trends will help to determine what pairs will move, especially trends on the larger time frames.
Here is a forex trend strategy you can use: If all of the JPY pairs are moving up on the D1 time frame trend, this means that the JPY is weak. By having the USD/JPY, CAD/JPY, GBP/JPY, etc. on one screen traders can make much better decisions when they enter trades based on the trends of the market. This same forex trend technique applies to any group of pairs with one common currency. Learn more about this forex trend technique in this article about multiple time frame analysis by individual currency.
Forex News Can Cause Price Movement
Forex news drivers and scheduled news can cause a lot of price movement on currency pairs. If any of the eight major currencies have a scheduled news driver or unexpected news, the currency markets can move fast, depending on the outcome of the news. There are no EUR/USD news or USD/JPY news per se. Just news drivers for the individual currencies that comprise the pair. Traders should learn all they can about how forex news can impact movement. Traders can see the exact times of potential currency movement on the forex news calendar. See the JPY news items in red below on the calendar.
Forex Technical Indicators Are Ineffective
Almost all forex traders scalp with technical indicators like RSI, Bollinger bands, Aroon, Divergence, etc. But these technical indicators are massive failure for traders and a waste of time. Will technical indicators help a trader to determine the cause of why a currency pairs move? No they will not, technical indicators are just drawings on a piece of paper or computer screen, they will not tell you why a currency pair moves. They are completely flawed. We recommend not using forex technical indicators as part of any good forex trading system.
Some Currency Pairs Move Faster Than Others
Some currency pairs are more naturally volatile than others. Of the top 28 currency pairs, a 1% movement can be much more or less than another pair. For some pairs 1% movement can be 250 pips, and other pairs a 1% movement can be 75 pips. To learn more about the 1% rule we have a great article about currency pair characteristics where you can estimate forex volatility for any pair. This is not a tool like a forex volatility calculator, but a technique that allow you to quickly estimate the volatility of the pair you are trading.
A low volatility currency pair can become much more volatile if one currency is consistently strong and one pair is consistently weak, we refer to this as a “slingshot”. The example below shows an 80 pip movement for the AUD/USD pair just because the AUD was strong and the USD was slightly weak. If you have a more volatile pair with one currency consistently strong and the other consistently weak, these pairs can move 250-300 pips in one trading session. This type of movement is somewhat regular using The Forex Heatmap® currency strength signal system.
When Is The Best Time Of Day For Lots Of Currency Pair Movement
The forex market is 24 hour market. But the best time to trade forex market is a much narrower window of time called the main trading session. It is about 5 hours every Monday through Friday. Learn more about the forex trading sessions and spend less time in front of the computer and still have the best chance to make pips, every day.
Conclusions about what makes currency pairs move:
We know that fundamentals like interest rates, currency strength, economic news, unexpected news, supply and demand, and natural high volatility of certain currency pairs causes a lot of movement. As traders we must have accurate alert systems, signals, and knowledge of the market conditions like trending or ranging to cash in and make consistent pips from these movements.
We advise avoiding technical indicators and trading on the smaller time frames. Examine individual currencies daily and trade in the direction of the major trends for better price movement and more net pips into your trading account.