Quick Guide: How to Decide Which Currency Pairs to Trade


“You can excel in many pursuits and professions simply by cultivating an ability to focus” – Cal Newport

It’s very easy to get distracted when trading Forex.

Forex is an unlimited environment. This is something new for most of us, who are used to working within well-defined boundaries. There are rules at school, at work and at home that limit our behaviour and our ability to express ourselves.

In Forex, there are no rules imposed upon us. We are free to do as we please.

With this freedom can come an alarming lack of focus. As a plucky aspiring trader it is all too easy to get lost in the noise.

There are too many ideas. Too many strategies. Too many gurus to listen to.

We have a tendency to get sidetracked, and we’re always tempted to do too much. Instead, we should cherish simplicity and not try to be perfect.

This is doubly true when it comes to currency pair selection – we see opportunity everywhere, and want to grab everything at once. The danger with this is, of course, that we can spread ourselves too thin.

But one of the fastest ways to become a successful trader is to limit your attention to a minimum number of currency pairs.

Let’s take a look at some factors you may want to consider when deciding where to put your precious focus.

Trading costs

Costs, that is high spreads, can kill trading systems. Everything else being equal, aim to choose the ones with the lowest cost.  Currency pairs like EURUSD, USDJPY and GBPUSD tend to be the cheapest options.

Your local edge

You are naturally going to have a handle on what is going on in your local economy.  Being on the ground can give you an advantage that an outsider lacks. If you are an Aussie, it makes sense to focus on AUD, if you are Canadian, then trade CAD and so on.

Consistent quality information

Limiting your focus allows you the time (and energy) to develop a fundamental view on the pairs you trade. But if you are unable to find the information you need consistently, then it becomes tricky to make timely decisions.

So if you don’t have a good consistent source of info about a currency, then cut that out of your trading repertoire. Yes, that means bye, bye Ruble and Shekel.

Number of trades needed to meet your goals

There is a delicate balance that needs to be struck between the number of pairs you are trading, and the number of trades you need to take to generate the results you are after.

If you limit yourself to too few currency pairs, you might find that you take lower quality trades in an effort to generate the number of trades you need.

Conversely, if you follow too many pairs, you could end up over-trading, or not being able to concentrate on your very best opportunities.

Think carefully about how many trades you need to place, and how many high quality set-ups you are going to get from each pair you trade.

Remember; with trading, sometimes less is more.

Your trading style

Some currency pairs are going to be better suited to your trading style than others.

Like volatility? Perhaps GBPJPY is for you.

Want to trade during the Asian session? USDJPY and AUDUSD it is.

Like the London open? GBPUSD, or EURUSD might suit you best.

There are many different permutations, so if you have a question about what might best suit your approach, ask it below.

Market conditions/market type

If you have a trading strategy that works best in a certain market type, or certain conditions such as risk-off, then this might dictate what currency pairs you trade.

For example, if stock markets are falling, perhaps you look to short AUDJPY.

Big picture opportunity

Your big picture analysis processes could direct you to trade a certain pair.

Perhaps you think Oil will go lower, so you start shorting the CAD. Maybe you think emerging markets (EM) are in trouble, so you sell EM currencies vs. the USD.

I’d like to know what you think

What currencies do you think offer the best prospects? What pairs best suit your style?

Do you find it easier to trade more or less pairs?

I’d like to hear your thoughts in the comments.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of  www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.

The post Quick Guide: How to Decide Which Currency Pairs to Trade appeared first on www.forextell.com.

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