The EUR/GBP (UK pound/dollar) rate drives the euro/GBP rate. For two different and dissimilar financial instruments, there is a high 95% correlation between the two. However, when arbitrageurs attempt to capture the international interest rate difference, it does not work quite so well. This explains traders why they often apply various other strategies to profit from the forex market.
For forex traders who prefer to use the Euro as their unit of measurement, the EUR/GBP rate represents the value of one unit of the Euro against the United States dollar. This means if you are trading one euro against one British pound, you will make some profit. If you are trading one British pound for one euro, then the deal you are making will lose you money. Therefore, it is important to understand that the euro and the GBP are not the only financial instruments traded on the forex market.
Traders also need to know which currency pairs are in which part of the world. Traders often look to other countries in order to confirm if they are on the correct path. A trader can look to see if the EUR/CAD (CADIBond on the Canadian Dollar) or the EUR/JPY (yen on the Japanese dollar) are being traded. If a trader thinks the EUR/CAD is being traded, then he or she can add the CAD on to the end of the price for confirmation. This gives you the clue that you are on the correct track.
Another indicator that you can use to determine the right way to trade is to check to see what the average conversion rates between the currencies are. The currency that is being traded is usually determined by the USD and the euro against the United States dollar. A good example of this would be when a trader is trading the EUR/GBP (the British pound and the euro against the dollar in the United Kingdom). If you are trading these two currency pairs, then you know that the euro has more potential to increase than the dollar.
You should also check out the changes in the exchange rate between the central bank of a country and another. This is a very powerful tool because you can determine when the euro should increase and decrease. You have seen the charts that show the euro rising and falling over time. The central bank usually has an interest in keeping the exchange rate low.
Traders also look to see if the euro crosses the psychologically important (USD} resistance point. The technical indicators tell you that this is a strong level where prices will continue to rise. Traders usually try to set up their stops at this point. When traders see that the euro crosses the psychologically important level, they will close out their positions and take profit.
Another way that a trader thinks about pairs is based on whether the pairs have a US base currency and a Japanese base currency. If the euro trades against the US base currency, then the trader thinks that the euro is going to go up against the dollar. If the euro trades with the Japanese base currency, then the trader thinks that the euro is going to go down against the dollar. Usually, the euro trades above or below the US base currency depending on the situation. You should use technical analysis when you are analyzing the pairs because this will help you determine when to buy or sell.
To summarize, a trader might want to determine how strong each of the pairs is and then make a trade based on their analysis. If the euro trades very strongly versus the dollar, then the trader may want to buy the euro and put money on the safe side. If the euro trades very poorly versus the dollar, then the trader may want to sell the euro and buy dollars to try and take advantage of the weakness of the euro versus the dollar. However, before any trading activity happens, traders should study the history of the major pairs so that they can predict what each of them will do next. This will keep them from making bad decisions during their trading.