Many forex traders choose the currency pair for trading without much study. Many traders make the mistake of forming their opinion around only one currency in the pair, ignoring the other currency in the pair. Right choice of the currency pair is essential for making good returns.

USD is the most important currency in the world economy. USD is heavily traded against other currencies. Many trader trade currency pairs like USD/EUR, USD/GBP, USD/JPY, USD/CHF etc. Many make the mistake of only studying USD while ignoring the other currency in the pair.

In the forex market, this neglect of the foreign economic conditions can greatly hinder the profitability of the trade. It also increases the odds of a loss. You need to understand a little bit of fundamental analysis when you make your choice of the currency pair.

When trading against a strong economy, the chances of failure are more. The weak currency could flop badly while the strong currency may appreciate more than you calculated.

You must study the economies of both the currencies before you decide to trade a particular currency pair. The best trading strategy is to find the strong economy/weak economy pairing. This has the potential of giving maximum returns.

Lets make it clear with an example, FED announced its intention of containing inflationary pressures in the US economy in March 22, 2005 FOMC meeting. Most currencies depreciated against the dollar on the release of the announcement. During that time, other positive economic data also reinforced the dollar.

When the initial market reaction was over, GBP rebounded and recovered its lost strength, due to the consistent economic growth shown by the British economy at that time. However, JPY kept on depreciating due to the week performance of the Japanese economy during that time. Dollar almost gained more than 300 pips in two weeks against the Yen after March 22, 2005.

Therefore, USD strength had a much higher impact on the struggling Yen as compared to the consistently strong GBP.

When you choose a currency pair, study the economies of both the currencies in the pair. You also need to examine the behavior of various crosses. In nutshell, the best choice is always choose the strong economy/weak economy currencies.