With forex trading, one of the things that you are going to need to narrow down fairly early on is which currency pairs you want to trade. Now, considering all of the options available to you, this can be quite tricky.
For instance, should you simply pick at random? Do you stick with the majors or decide on lesser considered pairs? Are there pairings that are more superior to others? In this article, we discuss how to decide on currency pairs to trade with. Here is what you need to know:
Start Small at First
Before you go any further, there is one piece of advice that you should adhere to in the beginning. Typically, it is best to start off with one pair, at least until you are more comfortable with forex trading. Many traders believe that by choosing several currency pairs, they are giving themselves a better chance at success. However, what usually happens is that they end up juggling too many duties and end up losing out with one if not more of the pairs.
The Major Currency Pairs
There are some currencies that are more well-known or widely used than others. At the very top of this list is the United States dollar. Since they have the largest economy which constitutes about 25 percent of the gross world product, it is usually the favored reference currency. Not to mention, it is largely considered to be the reserve currency of the world.
Along with the US dollar, other important currencies are the Euro, Japanese Yen, British Pound, Australian dollar, Swiss Franc. These are what are frequently traded against the dollar. Together, they make up what is known as major currency pairs.
Now, most people assume that these major currency pairs are the best ones to trade with. However, while the major currencies are the most traded pairs, they are not always the best. These pairs tend to be the most volatile as they experience fluctuations throughout the trading day. This volatility, though, gives you just as much chance to make money as to lose it. The most important thing to remember about major pairs is that they have favorable trading conditions due to lower spreads. Despite this, these may not be the best for you.
Choosing a Compatible Currency Pair
When choosing a currency pair, any currency pair, information and analysis will be your most powerful tools. This will help you to gain a better idea about the direction in which the price of a given pair will move during a particular time period. You need to be able to understand what influences price changes, whether there is volatility, and how one currency can work against another.
It is the conditions mentioned above that prove that choosing major currency pairs is not always the best option for everyone. Rather, you may find greater success with choosing pairs that you are familiar with. Since you have a greater understanding of the value as well as the factors that influence it, you have the upper hand. Oftentimes, traders find that dealing with their local currency can be quite helpful.
As a rule of thumb, stay away from currency pairs with high spreads and stick to those with 0 – 3 pips. The higher that you go, the more expensive that it can get for you. Anything over six pips may prove to be too costly for the average trader.
Good Options for Beginners
If you are looking for something relatively easy to start off with, you may want to try USD/EUR. This is largely because of its low spreads and that the technical analysis that is involved is quite simplistic. Also, these pairs experience minimal volatility so you don’t have to take on a lot of risk. The USD/JPY can be just as profitable for new traders.
This is how to decide on currency pairs to trade with. You should consider what you are comfortable with along with what can provide you with the greatest profit.