Forex is unique in many different ways, but the fact that currencies are traded in pairs allows traders to make use of the “Forex triad” approach which can help traders trade multiple pairs at the same time without much extra effort; the Forex triad relationship also enables traders to filter out low probability setups and potentially find better trades; and we show you how.
What is a Forex triad?
A Forex triad is, as the name suggests, a combination of three currency pairs. For example, the EUR/USD, the GBP/USD and the EUR/GBP are a Forex triad. As you can see when looking at the currencies, there are three individual currencies that make up the Forex triad: Euro, US-Dollar, British Pound.
The relationship between Forex pairs
To understand how to use a Forex triad in your trading, we have to do a little math. Don’t worry, this is super easy and it just serves the purpose to show you how the three Forex pairs are connected. During your actual trading you don’t have to do any math.
Let’s come back to our previous Forex triad using the EUR/USD, the GBP/USD and the EUR/GBP. Did you know that you only need two of the three pairs and you can tell EXACTLY what the rate of the third one is? By multiplying the rate of the EUR/GBP and the GBP/USD you get the exchange rate of the EUR/USD! The screenshot below shows you the relationship for all three Forex pairs.
What moves a Forex pair?
The fact that currencies are traded in pairs means that a Forex pair only moves if there is an imbalance between the two currencies. In Forex trading you can see currency pairs as a scale – when the first quoted currency appreciates, the pair will go up and when the second currency appreciates, the pair will go down. It’s not that simple – and the way currency pairs move has to do with a lot with balance and imbalance; the graphic below shows you what has to happen for a currency pair to move. If you don’t fully understand what the graphic is telling you, we will take a look at some charts next with a few chart studies.
Forex trading with the Forex triad step by step
The previous examples explained the unique characteristics of Forex pairs and what causes a Forex pair to move. When it comes to the Forex triad, there are similar forces at work and it all comes down to balance and imbalance. Once you start putting the Forex triad on your trading platform, you will start to get a feeling of how the currencies pairs interact. To fully understand the next three screenshots notice how two pairs of the three pairs do the same thing, while the third behaves differently. This will tell you a lot about the balance and the strength within that triad.
In the first example below you can see that the EUR/USD and the GBP/USD moved down in a straight line and the EUR/GBP moved in a zig-zag fashion sideways; this tells you that the British Pound and the Euro were equally strong and that the driving factor in the triad was the US-Dollar.
When both the EUR/USD and the EUR/GBP moved sideways and the GBP/USD moved higher, as you can see in the screenshot below, the greatest imbalance existed between the Pound and the US-Dollar which showed the strongest price move.
And finally, when you see that the EUR/USD and the EUR/GBP moved higher, while the GBP/USD moved sideways, the Euro was likely to be the driving force and the Pound and the Dollar had similar strength.
Tip: You won’t get it right away and it takes time to understand how the different pairs interact. However, we urge you to start putting the Forex triad on your screen and just start observing how prices move. Make notes along the way with your observations. After 2 or 3 weeks, you will get completely new insights about the dynamics of the Forex market.
How to use Forex triads for better trading decisions
Understanding the dynamics between currency pairs and the Forex triad is important to make better trading decisions. But what do the relationships mean for a Forex trader? There are a few very specific benefits for the trader that understands how to use Forex triads:
- You can add more instruments to your watchlist without much extra work. When adding new pairs to your repertoire, always go for the triad first
- You can read market strength directly from your charts
- Understanding that two of the three pairs will move similar while the third behaves differently, can provide great insights
- The currency pair with the highest imbalance between the individual currencies usually makes for the best moves
- If you have to choose between two setups, you can take the one that moves the most – or avoid the one the moves sideways
- As a range-trader, look for the pair with the greatest balance because that pair less likely to break out