At some point early in a new trader’s development there comes the question “Which currency pair should I trade?” There are a few considerations involved. Let’s walk through them.
Trading time frame
Generally speaking, the longer the trading time frame a trader is looking to operate in, the more pairs should be included in their trading plan. There’s two main parts to this factor. One is the fact that the more short-term you trade the more specific attention you are likely to need to give to each pair you trade. High frequency intraday traders (scalpers, etc.) generally can only focus on one or two pairs. Longer term traders have the time to look at many of them.
The other factor is trading opportunities. Short-term traders can usually get plenty of trading opportunities out of a small number of pairs, but longer-term traders need a larger number to ensure they get enough quality chances. Think about a position time frame trader who is looking for trend following options. In any given pair there may only be a couple of trades a year, which is going to make performance very choppy. Tracking a larger number of pairs will tend to mean more trades and more consistent trading.
Some pairs are more suitable for certain types of trading than others. For many years the JPY pairs were excellent for trend trading, while GBP/USD has long been a notorious counter-trend mover. The variations in these sorts of patterns will tend to mean some pairs have characteristics more suited for how a trader wants to trade than others. Matching the two up will take some experimentation on the trader’s part.
Be aware, though, that markets do change. A pair that exhibited one set of characteristics for a long time can change. Sometimes it happens fairly suddenly, and sometimes the change is only temporary. Usually, though, changes in the trading characteristics of a pair are caused by some kind of shift in the bigger macroeconomic picture. For example, many pairs went from relatively low volatility, range-oriented patterns in the middle 2000s to more volatile and trendy in the latter part of the decade thanks to the financial crisis and related developments. This is something to always be monitored.
Volume, Volatility, and Liquidity
For the most part, the forex market has more than sufficient liquidity to allow ready trading in all the major pairs and crosses. Once you venture into the realm of more regional and emerging market currencies, however, things get trickier. Spreads can be very wide and the markets can be very choppy because of the low volume in those pairs. The vast majority of new traders would do well to keep away.
Minor pairs aside, there are considerations in terms of deciding on what pair or pairs to trade based on the time of day being trading for those looking to intraday or short-term trade. Pairs are always going to be more active during the primary trading day of the currencies involved. For example, the AUD and NZD will be most volatile and active during the Asian session. AUD/USD and NZD/USD will certainly move at other times of day based on the influencing factors on the USD, but when Sydney and Wellington are active, with data and news items being released, things are going to be that much more exciting in terms of short-term volatility.
The USD, of course, is a special case. It can and will react to all kinds of developments through the whole of the trading day. As a result, trading USD pairs will be suitable for just about all traders.
Trading account denomination
One of the harder things for new traders to wrap their heads around is often the accounting where trading a pair that doesn’t involve the currency their account is denominated in. For example, EUR/GBP is complex for a US-based trader because of the requirement to translate profits and losses from EUR or GBP back into USD. To keep things simple from that perspective, it’s probably best to start off focused only on pairs which have at the account currency as part of the pair.
Bringing it all together
Generally speaking, new forex traders are going to want to stick to the major pairs to avoid thin markets and high spreads. They will want to focus on pairs where one of the currencies is the same as their account currency. If day trading is the intended path, then picking pairs which tend to move during the time of day traded will be important. Similarly, short-term traders will want to narrow their focus down to a small number of pairs, but longer-term traders can look at many. Then it comes down to finding a pair or pairs which suit the style of trading the trader intends on using, which is going to require some testing and experimentation.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.