Optimal Currency Pairs to Trade In

By: John Arnold


One of the popular mistakes made by Forex traders is not knowing how to choose the correct trade to pursue as well as its corresponding direction. If you choice on this matter is right, then you have already won a large of the battle to make a profit. Instead, most traders spend an abnormal amount of time on perfecting their entry procedures or methods. They do not realize that the entry method makes very little difference to the eventual trading results if they take the time to choose the right trade for the day. Anybody can transform into professional at making entries on a 5-minute chart, but there is no value to it if you cannot choose the right trades by integrating the long-term perspective into your decision-making. So why do most traders constantly indulge in this mistake? How can they improve their decision-making re-garding their choice currency pairs on any given day?
Why Traders Are A Bit Careless With Their Pair Selection
A large majority of Forex traders join the business to make money lots of money quickly. And they are told that the best way to do this is to ignore the long-term timescale and focus only on shorter trends. This is true…partly. Certain currency pairs like EUR/USD have lower spreads and naturally the tendency is to pick them in an effort to cut costs. Another logical conclusion is to handle only those currencies which are very active during the trader’s working hours. Yet another approach is to limit your trades to specific currency pairs in order to understand or know their personalities inside out. The assumption here is that greater knowledge regarding a particular currency pair will eventually lead to more successful trades.

Such approaches are rational and do tend to work upto a certain extent. But the main problem is that none of them can be considered as the most important method to utilize while approaching your currency pair trading decisions. I can provide proof that they don’t work from my own personal experience. When I got into the world of Forex trading, I restricted myself to trading GBP/USD and EUR/USD currency pairs all the time. Over a period of months, there was barely any movement in these two pairs while the USD/JPY pair blew the roof and made a lot of money for people trading in it. To be fair, I did understand my chosen currency pairs very well and implemented a solid strategy on them for years while making a decent amount of money. These pairs were also most active during my work period, but all of these favourable factors only ended up making me miss out on the best trading opportunities during that time period.
The Most Important Factor to Consider While Picking Your Ideal Cur-rency Pair
It is probably better to explain the most important factor through an example. Let us assume that you are in a casino to gamble and that you need your opponents to take more risks in or-der for you to make a profit. In other words, their losses will increase your chances of making greater profits. The Forex market also pretty much works in the same way.

Once you are in the casino, which table should you decide to sit at?
1. The table which has the most number of opponents, the most money and the busiest of them all.
2. Or a relatively silent one which placed in the corner of the room and only has a few players looking for a calm night of winnings.

It is quite obvious that the busiest table increases your chances of winning and the Forex mar-ket also operates on the same principle. You want to trade with ‘happening’ currencies all the time and basically be present at or close to where all the action takes place. But is there any way to anticipate these happenings before they take place?

You can start by going through the latest Forex news on a regular basis and take note of any major changes or agreements taking place currently in the market. There are also other ways to conduct a more narrow and single-minded search like reliable statistics which provide a hint on the currencies which are being traded heavily. During the last few months, the Japa-nese Yen, U.S. Dollar and the Euro have experienced the most action with the U.S. Dollar being the leader. Hence, it is logical for you to place greater emphasis on other currency types against the U.S. Dollar. You don’t have to open up your trading platform in the middle of the night and worry if the Australian Dollar/British Pound cross is where the real action is at.
Pruning The Field
Once you know which currency pairs to focus on, it is easier to pick an optimal time to trade one or more of them on any given day. The question you have to ask yourself is which cur-rency pair is more likely to exhibit the highest amount of volatility? A largely stable price does not allow you to make money, so volatility in the form of big price differentials is necessary to make a good amount of profit. Some of the best ways to predict volatility in the market are listed below for your perusal.

The most important thing to know about predicting the market are volatility clusters which borrow the principles of statistics. Let us examine it in the form of an example. Let us assume that a specific currency pair is exhibiting a movement of 1% of its value as an average over several days. Out of the blue, it registers a movement of 3% of its value on one fine morning. Volatility clustering, which was confirmed by a data scientist named Benoit Man-delbrot, states that this currency pair is pretty likely to register a movement exceeding 1% on the next day as well. In fact, the movement on the next day will be closer to 3%. In other words, when a currency pair registers sudden high volatility, it is more likely to continue along with that trend rather than stabilize, at least in the short term.

Another method is to find out the average true range (ATR) of a particular currency pair during the past week or 10 days. The values should be calculated as percentages of a currency pairs’s value from the beginning of the chosen time period. The pair which has the largest value, is more likely to show volatility. Hence, you are better off focusing on it.

Another variable to consider is the momentum of the major international currencies like the Euro, U.S. Dollar and Japanese Yen which have registered a tendency to shift in the same direction as their long-term trends suggest. One good habit to utilize is to keep asking yourself if the position of the price compared to its position 4-6 months ago. Then, you should proceed by trading largely, or completely, in the same way as the long-term movement suggests.

The Japanese Yen or the Australian Dollar provide you with the best trade opportunities if you are practising your profession during the Asian business hours alone. But the optimal practice is to somehow develop the habit of trading over longer time periods within a day. This ensures that you won’t miss out on some profit making trades during your period of rest.

One final tip is on the economic calendar and keeping yourself informed about the release of vital of economic data on various key currencies. If you are in a trade before any such vital release, you will notice that an opportunity for market volatility rises during such time periods. Hence, you can prepare yourself for some volatility or even make a tremendous amount of profit from a trade.

To conclude, prune your attention down to a few major currency pairs, only involve yourself with pairs which register strong volatility, and keep an eye out for major long-term trends. This way, you can create for yourself the best chance of success in the world of Forex trading.

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