Currency pairs are critical for maximizing the profit on your investment, but what are they, and how do you utilize them? Continue reading this blog to know about how to choose the best currency pairs to suit your Forex strategy.
Many novice traders stick to less unstable currency pairs or trade just one currency pair. However, there are instances when it is preferable to broaden and operate with a competitive or centralized pair.
One of the most critical aspects of forex trading is selecting the appropriate currency pair and trading technique. Selecting the right pair can generate sizable revenue while choosing the incorrect pair would result in a loss. This is one of the parallels between the forex market and the stock market—except that we are exchanging currencies rather than growth stocks.
The Volatility-Liquidity Link
There are a few fundamentals you should understand before delving further.
- In general, currency pairs with a higher money supply have less uncertainty and less danger than other pairs. In addition, the increased trading volume contributes to the low volatility.
- By comparison, pairs with lower liquidity/volume tend to be more volatile.
When selecting a currency pair in the Forex trading, there are three critical factors to remember.
First, determine whether the pair is gaining popularity.
Second, decide on the trading method you would use.
Finally, you want to determine the pair’s true average range (which means how much the pair is traded on an everyday basis).
You can read one of the AXI reviews to select the optimal currency pair to trade based on your trading style and technique.
Identify the Trend
The first step in determining which pair to exchange is to determine the trend. A trend is described as the market’s current trajectory in recent times; for example, “the AUD/USD has been in a downward trend for the last six months.” Trends can be identified using economic indicators or by incorporating moving averages (MA) into your charts. If the pair has not trended, it is critical to consider an upwards trend before deciding which pair to exchange.
Pairing your Trend with the Trading Strategy
The next step in determining the best pair to exchange is to confirm that those pairs match your trading strategy. If you are trading a trending technique, the pairs you trade must also be trending. If you attempt to trade a trending tactic on a downwards pair, you will end up with a losing strategy. Suppose you employ a trending approach and recognize trending pairs, the chances of becoming a successful trader increase significantly. Additionally, suppose you discover a pair that has been going sideways for an extended period. In that case, it is critical to fit the pair with a spread trading or sideways market trading strategy. You may apply several strategies to each pair, but it is crucial to understand how each pair behaves before trading. Numerous traders make the error of pairing the incorrect pair with the wrong strategy.
Noting the ATR
The Average True Range (ATR) is the moderate daily activity in pips. ATR is critical because if you do not know how often a pair shifts on average, you significantly increase the likelihood of hitting your stop loss. This is critical when deciding which pairs to trade depending on your trading approach and goals. For instance, if you are a competitive trader who is scalping and attempting to earn a high point gain in a brief span of time, you would want to pay close attention to pairs with a high ATR, as these can shift a lot, and you do not wish to your stop loss to become too tight. Thus, noticing the Average True Range of the country’s currency and the technique you want to trade makes a massive difference in a successful trading outcome.
Choosing Pairs to Trade
Less unpredictable pairs are often the best option for newcomers. However, volatile pairs provide seasoned traders with a more significant opportunity to benefit from their transactions due to their more dynamic price changes.
When determining how much to invest, you should consider your risk exposure, desire for financial leverage, the ability to enter and exit trades at will, and your familiarity with specific currencies over the short and long term.
Common Volatile Pairs
There is no simple answer to the question of a global approach for trading each pair. But, to begin, you must gain as much information as possible about the currencies and the diplomatic, economic, and relational factors that influence them.
It is difficult to compile a comprehensive list of the most unpredictable currency pairs because volatility fluctuates constantly. However, there are several common and frequently traded volatile pairs, including the following:
- NZD/JPY (New Zealand dollar/Japanese yen)
- AUD/GBP (Australian dollar/Pound sterling)
- AUD/JPY (Australian dollar/Japanese yen)
- AUD/USD (Australian dollar/US dollar)
- CAD/JPY (Canadian dollar/Japanese yen)
There are a few things you should know about these often traded volatile pairs.
Both volatile currencies are more vulnerable to fluctuation than low inflation currency pairs. Additionally, major news events such as Brexit or trade policies may have a significant effect on the performance of a currency.
Moreover, data releases, data breaches, and privacy violations may have an impact. This can have an even more significant impact on more volatile pairs. By using a financial calendar, traders will keep ahead of data releases.
As previously mentioned, you will want to monitor a currency’s capacity. Consider the US dollar, for instance, and how it has been influenced in recent years. Consider your risk tolerance, capacity, and market experience when determining whether a volatile pair-based approach is successful for you.
Although a strategy based on volatile pairings is not for all, it does provide an option for investors with adequate certainty.
Most traders disregard the importance of carefully choosing their currency pair and assume that they can exchange any combination with any approach. Regrettably, this trading strategy is one of the primary reasons novices lose money, so avoid making the same mistake of matching the incorrect pair/strategy. You’re now equipped with the knowledge necessary to choose the optimal currency pair and trading strategy to maximize your profits.