One of the most important things in trading is picking the right currency pair, combined with the right trading strategy. Choosing correctly has the potential to make a huge profit, while choosing the wrong pair will lose money. This is one of the similarities that the forex market shares with the stocks market- except rather than trading individual stocks we’re trading currency pairs.
When you trade it is important to make your money work for you, As Kevin O’Leary says:
There are three main things to consider when choosing your pair in the Forex market.
First, identify whether the pair is a trending or non-trending pair.
Second, figure out what type of strategy you will be trading.
Finally, you want to know the average true range of that pair (which means how much the pair moves on a day-to-day basis).
This article will explain in detail how to choose the perfect pair to trade for your specific trading style and strategy.
Step one: Identify the Trend
The first thing you must do when choosing which pair to trade is to identify the trend. A trend is defined as the overall direction in which the market has moved in the recent past, for example “the Aud/Usd has been in a downtrend for the past 6 months”. You can identify trends either by using trend lines or by applying moving averages (MA) to your charts. If the pair has not been trending, it will be important to take note of the sideways trend before you decide which pair to trade.
Step two: Pairing your Trend with the Trading Strategy
The next step to finding the right pair to trade is to make sure that those pairs fit the strategy you intend to trade. If you’re trading a trending strategy- your pairs must be trending pairs. If you try to trade a trending strategy on a pair that is sideways, you will have a losing strategy. If you have a trending strategy and you identify pairs that are trending, your chance of being a profitable trader goes up a great deal. Additionally, if you find a pair that has been moving sideways for a period of time it will be important that you choose a range trading or sideways market trading strategy to match up with those pairs. There are many strategies that you can apply for each different pair but it’s important that you know what the behavior of each pair is before you trade it. Many traders make the mistake of matching up the right pair to the wrong strategy.
Step Three: Noting the ATR
Average True Range (ATR) is the amount, on average, of movement in pips in a single day. ATR is important because if you don’t know how much a pair moves on average, it is much more likely that you will hit your stop loss. This is important when determining the pairs you want to trade based on your strategy and trading objectives. If you are an aggressive trader who is scalping and trying to make a high percentage gain in a short period of time, you will want to take special note of the pairs that have a high ATR because those can move a lot so you don’t want your stop loss too tight. Knowing the average true range of the currency pair and the strategy you’re planning to trade makes a huge difference in the success or failure of your trading.
— Casey Stubbs (@caseystubbs) November 6, 2015
Most traders overlook carefully selecting the currency pair that they’re trading and believe that they can trade any pair with any strategy. This trading strategy is one of the main reasons that rookies lose money, so don’t make the same mistake of pairing the wrong pair/strategy. You’re now armed with the information to pick the right currency pair with the right strategy to enhance your trading.