Forex trading involves the buying and selling of currency pairs to make a profit. Understanding the relationship between currency pairs is crucial to succeed in forex trading. Two terms that are often used in the forex market are parallel and inverse pairs. In this article, we will explain what these pairs are and how they work.
Parallel Pairs
Parallel pairs refer to two currency pairs that move in the same direction. For example, if the EUR/USD and GBP/USD are both moving up, they are considered parallel pairs. Similarly, if they are both moving down, they are again considered parallel pairs.
The reason why these pairs move in the same direction is that they are both tied to the US dollar. The US dollar is the most traded currency in the world, and it is used as the base currency in many currency pairs. Therefore, if there is a significant change in the value of the US dollar, it will affect all currency pairs that have the US dollar as the base currency.
For instance, if the US Federal Reserve decides to increase interest rates, it will make the US dollar more valuable. This change will affect all currency pairs that have the US dollar as the base currency, making them move in the same direction, i.e., parallel.
Inverse Pairs
Inverse pairs refer to two currency pairs that move in the opposite direction. For example, if the EUR/USD is moving up and the USD/JPY is moving down, they are considered inverse pairs. Similarly, if the EUR/USD is moving down, and the USD/JPY is moving up, they are again considered inverse pairs.
The reason why these pairs move in opposite directions is that they have different base currencies. For example, the EUR/USD has the Euro as the base currency, while the USD/JPY has the US dollar as the base currency. Therefore, if there is a significant change in the value of the US dollar, it will affect the USD/JPY pair in the opposite direction as it does to the EUR/USD pair.
For instance, if the US Federal Reserve decides to increase interest rates, it will make the US dollar more valuable, causing the EUR/USD pair to move down. At the same time, it will make the USD/JPY pair move up, as the Japanese Yen loses value against the US dollar.
Why Parallel and Inverse Pairs are Important
Parallel and inverse pairs are essential to forex traders as they help to identify trading opportunities. If a trader sees that two parallel pairs are moving in the same direction, it is an indication of a strong trend. On the other hand, if two inverse pairs are moving in opposite directions, it is also an indication of a strong trend.
For example, if the EUR/USD and the GBP/USD are both moving up, it indicates that the US dollar is losing value. Therefore, a trader could sell the USD/JPY pair, as it is an inverse pair, and expect it to move down as the Japanese Yen gains value against the US dollar.
Similarly, if the EUR/USD is moving up, and the USD/JPY is moving down, it indicates that the Euro is gaining value against the US dollar, while the Japanese Yen is gaining value against the US dollar. Therefore, a trader could buy the EUR/JPY pair, which is a cross pair, and expect it to move up.
Conclusion
Parallel and inverse pairs are essential concepts in forex trading. They help traders identify trading opportunities by understanding the relationship between different currency pairs. By understanding how parallel and inverse pairs work, traders can make informed trading decisions and increase their chances of success in the forex market.
