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Understanding Minor Currency Trading


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Understanding Minor Currency Trading

Although many currency traders focus on major Forex pairs, there are often handsome profits to be made in trading minor currencies. For example, the currency that has risen most significantly again the US dollar in 2012 is the Colombian peso. In fundamental analysis of Forex pairs is typically easier to analyze major currencies like the US dollar, Yen, or British pound than minor currencies like the Colombian peso. However, for those with the insight, perseverance, and time, understanding minor currency trading and taking advantage of the increased volatility therein can lead to handsome profits. Technical analysis is also an issue with minor currencies as they tend to trade in relatively small volume. Thus the first step to understanding minor currency trading is to focus on fundamentals.

If Technical Analysis is Your Strength

While technical analysis of major Forex currencies works for those trading the Yen against the Euro it has its faults when dealing with low volume minor currencies. The statistical analysis that is the backbone of sound technical trading works best when currencies trade at high volume and liquidity. The better choice if technical analysis is your forte and understanding minor currency trading is your goal is to trade a minor against a major. In trading a major versus a minor currency the usual best choice for the major is the US dollar as it is involved in roughly 85% of all currency trades. In fact when one trades a minor against a minor the common route is to trade the first against the dollar and then the dollar against the other currency.

What Factors Drive the Colombian Peso of Any Other Minor Currency?

As we noted above the Colombia Peso performed the best of all currencies versus the US dollar in 2012. This honor may go to the Brazilian Real, Indian Rupee, or Russian Ruble in any other given year. The trick to success in trading a minor currency is to anticipate which currency will perform will and/or which currency will perform poorly during the year. This requires that the trader delve into the fundamentals of the economy or economies involved for better understanding minor currency trading. It requires, in the case of a country like Colombia, knowledge of its natural resource base, political stability, and balance of payments. The fact that a nation such as Colombia is coming out of a protracted civil war is pertinent to understanding minor currency trading of the Colombian Peso. Understanding the situation on the Indian subcontinent is germane to trading the Rupee. The fact that Pakistan and India are putting differences aside and looking to the future is a positive for the Rupee.

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