The Forex market has a large list of currency pairs that traders can choose to trade. Each country (or economic zone) offers its currency in an exchange with another currency zone, which creates dozens of currency crosses. The list varies from the most famous (i.e. EURUSD) to pairs which are less known (i.e. GBPZAR). Within that “jungle” of currency pairs, how does a trader know which pairs to select and trade?
Today’s post will provide guidance on how you can select currency pairs in the Forex market. Eight methods are mentioned for you to choose the best ones, including currency correlations.
FACTOR 1 STRATEGY TYPE
Selecting the best pairs depends on your strategy. Simply put, a trending strategy will have different “best moving” and ideal pairs than a reversal strategy. Obviously, if the EURUSD is a trend then this is a great currency pair for a trend trader, but not so good for a range or reversal trader. Basically, you want to select the pairs which have the best match with the market structure you are looking for in the strategy.
This status is “dynamic”, which means that pairs change their status from trending to reversal to range constantly and you can analyze the pairs to select the ones that best match your strategy. If you use this method, then it is certainly possible that a pair which was interesting in the past becomes less interesting in the future; and vice versa. For instance, if you are a trend trader and the EURUSD breaks out of its consolidation to start a downtrend, then this price action and the pair would become interesting.
FACTOR 2 CURRENCY CORRELATIONS
Selecting the best pairs depends on how closely currency pairs correlation with the other pairs. When 2 pairs are closely correlated (positive or negative) with each other, there is a high chance that the trading result will be the same (both loss/both win). This is a considerable disadvantage as more risk is taken without any diversification benefit.
FACTOR 3 RELIANCE ON 1 CURRENCY
Selecting the best moving pairs depends on avoiding over-reliance one currency. When you only trade one currency against all other currencies, you have all of your eggs in one basket. This means that if the Euro drops and you are long on a numerous Euro related crosses, then chances are high that you are losing many of those Euro longs. Hence it is usually better to spread the risk and choose a variety of currencies. You can opt to include some Euro pairs but also choose some non-Euro pairs to make your overall approach more balanced. Be sure to read the guide on the best forex hedging strategies.
FACTOR 4 STRATEGY MIX / PORTFOLIO
Selecting the best moving pairs depends on your strategy mix. Of course, if you are trading with a single strategy then this factor is irrelevant. But for those that trade multiple strategies, it is smart to analyze whether your strategies are not over-reliant on the same or correlated currency pairs. Even though the strategies are different, there could be an increased risk associated with trading the same pairs from a portfolio perspective.
FACTOR 5 FOREX TOOLS AND INDICATORS
Selecting the best moving pairs depends on choosing tools and indicators. The most important factor is that you gain experience with the tool and indicator or your choice. No indicator or tool is 100% perfect; nor will it ever be in the future. It is your knowledge, familiarity, and practice with it that gives you the edge. However, for example, useful tools and indicators for selecting pairs could be Fibonacci, ATR, oscillators, trend lines, moving averages, etc. Using a combination of tools and indicators to identify confluence, together with spotting patterns such as chart patterns, candles stick patterns, trend patterns, reversal patterns, etc help traders gain a bigger edge when trading.
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FACTOR 6 YOUR OWN CHOICE
Selecting the best moving pairs depends on your personal choice and preference. If you do not “like” the GBPJPY for whatever reason, then simply do not trade it. Your forex experience with currency pairs is very valid and you can use it for selecting pairs. Having a track record on how particular pair moves (in conjunction with your strategy) will help you identify the more profitable pairs. Your choice also depends on the time available for analyzing, monitoring, trading and managing various currency pairs. You might discover that the currency pair you have added to your trade list is, in fact, one pair too much to handle.
FACTOR 7 CURRENCY CHARACTERISTICS
Selecting the best moving pairs depends on the behavior of pairs versus your own psychology and strategy. Certain currency pairs are great in trending modes (such as the EURAUD), others are well suited for scalping due to their expected volatility (GBPJPY), whereas slower moving pairs could be a good match for part-time traders (EURGBP). Each currency pair has its own particulars and characteristics. Some of them will go along more with you and your strategy than others.
FACTOR 8 ILLIQUID PAIRS
Selecting the best moving pairs depends on selecting pairs that a decent number of traders actually trade and which have decent spreads. Although for instance, the currency pair GBPZAR could have a perfect setup according to your strategy, whether you would want to trade this pair is a question mark. The best pairs are the majors and major crosses.
Those include for example the EURUSD, GBPUSD, USDJPY, AUDUSD, USDCAD, USDCHF. Important crosses are EURJPY, GBPJPY, EURAUD, GBPAUD, EURGBP, NZDUSD. Other crosses with less importance but still considered tradable are GBPCHF, AUDCAD, EURNZD, GBPNZD, EURCAD, GBPCAD, and some more. Most traders want to stick to these pairs unless there is a specific reason to do trade others. You may also enjoy this article on ATR trading.
Is there another factor that you consider when selecting the best pairs in forex?
Which of the above factors is most important for YOU? Currency correlations? Currency characteristics?
Let us know down below in the comments section!
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