Triangulation of Currencies
Introduction
With over 15 years of experience in the markets, Chris will walk you through one of the essential yet often overlooked strategies in Forex trading – Triangulation. This technique focuses on understanding relative currency value and helps traders identify stronger or weaker currencies within the forex market. In this video, we’ll also cover how to evaluate cross-currency pairs and make informed trading decisions.
Table of Contents
Understanding Relative Currency Value
When trading currencies, you are always trading the relative value of one currency against another. The concept of relative value means that it’s not just about whether a currency is going up or down; it’s about how strong one currency is compared to another. This principle applies universally, but nowhere is it more evident than in Forex markets.
Triangulation Strategy
Triangulation is a fundamental trading strategy that helps you determine which currencies to trade. It involves analyzing multiple currency pairs to identify relative strength and weakness. For example, when the US dollar weakens across multiple pairs, you can look for the strongest currency to pair with a weaker one, maximizing the potential for profitable trades.
Examples of Relative Strength in Currency Pairs
Australian Dollar vs. New Zealand Dollar
This currency pair is often volatile and less talked about, but it provides valuable insights into currency strength. If the US dollar is weakening, and the Australian dollar is stronger against the New Zealand dollar, you might focus on buying AUD/USD.
Euro vs. Pound
Another example is the Euro-Pound pair. When the US dollar strengthens, traders must decide which currency to short. If the Euro is weaker than the Pound, a short EUR/USD trade would make more sense than a short GBP/USD.
Using the US Dollar Index to Guide Trades
The US Dollar Index (DXY) is a useful tool that tracks the value of the US dollar against a basket of major currencies. It can help confirm whether the US dollar is strengthening or weakening. When using triangulation, the US Dollar Index can guide you to decide whether to buy or sell USD against other currencies.
Comparing Strong and Weak Currencies in Action
Australian Dollar vs. New Zealand Dollar
Looking at charts, you might find that the AUD/USD pair is approaching a support level. If the US dollar is expected to strengthen, you could decide to short the Australian dollar and buy US dollars.
New Zealand Dollar vs. US Dollar
Comparing NZD/USD to AUD/USD, if the New Zealand dollar appears weaker than the Australian dollar, it could indicate a better opportunity to short NZD/USD instead of AUD/USD.
Cross-Currency Examples
Mexican Peso vs. Japanese Yen
By analyzing cross currencies like the Mexican Peso against the Japanese Yen, you can assess which is stronger. In this case, if the US dollar is strong, you may be better off buying USD/MXN rather than USD/JPY since the Peso might offer more upside due to its relative weakness.
Putting It All Together: Choosing the Best Pair to Trade
The essence of triangulation is matching the strongest currencies with the weakest ones to optimize trade outcomes. If both the US dollar and Japanese yen are rising, you’ll likely get more mileage from shorting the Mexican peso than the yen. This approach simplifies your decision-making process when choosing currency pairs to trade.
Final Tips for Using Triangulation in Your Strategy
When applying the triangulation method, consider the broader fundamentals such as cross-border trade and economic factors that influence currency strength. Once you have identified the stronger and weaker currencies, wait for technical setups like bullish engulfing candlesticks or Fibonacci retracements to trigger your trades. By combining technical and fundamental insights, triangulation becomes a powerful tool for any forex trader.
Conclusion:
In this video, Chris explained how to analyze relative value through triangulation, along with practical examples to help you master this essential Forex strategy. By focusing on the relative strength of currencies and using cross-currency comparisons, you’ll be able to make more informed and profitable trading decisions.
Stay tuned for more educational content from Hola Prime Academy, where we bring advanced concepts to light in simple, actionable ways!