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How to choose a currency pair to trade forex

How to choose a currency pair to trade forex

When a trader comes into forex trading, or plans to expand his arsenal of trading tools with Forex, he will inevitably ask himself the question: Which currency pair to choose to trade?

In this article, we will look at the most popular currency pairs and enlist the criteria for choosing the most suitable one for trading.

What is a currency pair?

A currency pair is a quote for two different currencies, it represents the exchange rate and acts as a subject for foreign exchange trading.

The standard quote for a currency pair is:

Base currency / list currency

The process of trading means that the trader is buying or selling the base currency of the listing currency.

Base currency It is the currency on the left – the currency you buy / sell. List currency Is the currency on the right – it expresses the price of the base currency.

Take a look at the EUR / USD currency pair, for example:

  • The euro is the euro, the base currency
  • The US dollar is the US dollar, the quote currency
  • The current exchange rate for the EUR / USD is 1.1270. Which means 1 Euro costs 1.1270 USD.

Forex It is the largest financial market in the world and shows the current dynamics of global trade. It contains a large number of currency pairs – from popular to exotic currency pairs. The most popular currency pairs, which account for the largest volume of global trade, are called the major currencies. These are often used for trading.

Characteristics of major currency pairs

The major Forex currency pairs and the pairs that consist of the most popular currencies in the global economy. Currently, these currencies are the US dollar, the euro, the Japanese yen, the Swiss franc, the British pound, the New Zealand dollar, the Australian dollar, and the Canadian dollar. It would be logical to add the CNH (Chinese yuan) here, but the exchange rate for this currency is controlled by the Chinese central bank, so CNH is not actively trading.

  • EUR / USD is the euro against the US dollar. American dollar. This is the most popular currency pair. The trading volume of the currency pair is maximum here, while the spread is small and the volatility is medium. It is most active during the European and US sessions and responds directly to news from the Euro-Zone and the US.
  • USD / CHF is the US dollar vs. Swiss Franc. Often it is against the EUR / USD pair. They move quietly and have a low spread. The Swiss Franc is a safe haven asset, so the pair may depreciate during crises. It is most active during European and American sessions.
  • GBP / USD is the British pound against the British pound. American dollar. The currency pair has higher volatility and is very popular with traders. Huge moves of many patterns can appear or shoot false shots close to stop loss. The pound is highly responsive to political events and economic data in Britain. This pair is most active during the European and American sessions.
  • USD / JPY is the US dollar vs. Just. The Japanese Yen is a completely exotic currency and can move against all other major pairs. It is a safe haven so this pair is prone to decline during crises and, on the contrary, to rally in times of high stock market dynamics. The couple is most active during the Asian session.
  • USD / CAD is the US dollar against the Canadian dollar. CAD is a commodity currency. Its development is linked to the dynamics of oil prices. Oil’s rally is pulling little down, while oil’s decline is pushing it higher. It is more active during the American session.
  • The Australian dollar / US dollar and New Zealand dollar / US dollar are the Australian dollar against the US dollar. US dollar and New Zealand vs. American dollar. These currency pairs behave very similarly. Under normal conditions, they would be quiet affected by the price of minerals and milk powder. They are most active during the Asian session.
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In addition to the major pairs, traders actively use cross rates (currency pairs without the US dollar):

  • EUR / JPY, GBP / JPY, EUR / GBP, EUR / CHF, GBP / CHF, EUR / CAD, GBP / CAD.

Popular forex and regional currency pairs are:

  • US Dollar / South African Rand, US Dollar / Mexican Peso, US Dollar / Turkish Lira, US Dollar / Russian Ruble.


How many currency pairs to use when trading

Many traders want to know how many currency pairs to use when trading. We believe there are two ways to solve the problem, depending on your trading style:


Minimum number of husbands

This approach is based on the fact that each currency pair is private and the nuances of its behavior can be studied if you focus on one or two pairs. When you spend some time mastering one pair and learn about the factors that affect it (important news, macroeconomic statistics), you can gain some advantages.


A wide range of couples

This approach is based on the use of certain patterns, price action patterns, candlesticks, etc. Once a trader learns to find a pattern in the price chart and is sure of its effectiveness, he can start trading it. For this approach, using multiple currency pairs makes sense: as the trader goes through the charts, finds patterns, and you get started.

Criteria for selecting currency pairs

Some parameters and characteristics of currency pairs will help you choose the most suitable one. A peculiarity of the currency market is its extremely high liquidity. The trader does not have to practically solve this parameter, because there is always supply and demand. So the following three criteria seem to be the most important:

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Activity time

Every currency pair has a time when it is most active. This is the time when trade volumes are greatest and price can fluctuate drastically. For example, the US dollar / Japanese yen, Australian dollar / US dollar, and New Zealand dollar / US dollar are active during the night and early morning European time (during the Asian session).

This is when the news that may affect the prices is published. If a trader only wants to trade during a certain period of the day, then it would be better for him to choose the pairs that are most active during the period available to him.


Volatility

Volatility is the range of fluctuations in a currency pair over time. We often rate it on D1. Some currency pairs trade in a relatively narrow price range, while others are widened.

The greater the volatility of the pair, the greater the potential profit, but also the loss. So the stop loss should be bigger. It’s up to everyone to decide individually, which one suits them best: high volatility with larger SLs – or low volatility with smaller SLs. If a trader wants to evaluate and compare the volatility of different pairs, he can try an indicator called the ATR (Average True Range).


Trade costs

Another important criterion for choosing currency pairs is the cost of trade. In Forex, the common cost is the spread (the difference between the buy and sell price). For advanced ECN accounts, the spread is minimal, but they have a small commission per trade. The major pairs usually have a few spreads. The prevalence of cross pairs is slightly higher, while uncommon pairs have the highest spreads.

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Final thoughts

Choosing a currency pair for trading requires an individual approach based on personal preferences. It is wise to start with the main pairs. Depending on the trading style, a trader will either focus on one pair or trade multiple pairs. Three important criteria will help him in choosing him – volatility, trading costs and trading time.

RoboMarkets Team
[email protected]
+42080088482
www.robomarkets.cz

Risk Warning:

  1. These materials and information contained in them are for informational purposes only and should in no way be construed as providing investment advice for the purposes of the Investment Firms Act 87 (I) 2017 of the Republic of Cyprus, or any other form of personal advice or advice related to certain types of transactions in types of Certain financial instruments.


  2. Past performance is not a reliable indicator of future results or future performance.