How do I pick a currency pair?

Credit: Jaco van den Berg

Picking a currency pair can be a stressful process, but it doesn’t have to be. Simple methods can be utilized to ensure a currency pair or pairs are right for you.

Currency pairs should be selected based on what trading strategies best suit you. Selecting a singular currencies pair to trade, a traded can become a specialist in trading that one pair. However, this may often lead to more limitations and forgone earning opportunities for you as the trader.

Specialising in one currency pair such as the United States Dollar vs The Swiss Franc (USDCHF) for example means that you must always trade this one pair, i.e. when it’s trending, choppy or quiet. This may play against you as your particular skill set and trading strategies may be better suited for particular market conditions. Limiting the trader to only trade the currency pair when the market conditions are suitable or increasing the risk factor as riskier trades may be entered when market conditions are not optimal for your strategy.

Diversification of currency pairs is an excellent way to decrease risk and increase potential earnings. Over-diversification can also have its limitations. Having too many currency pairs to watch may become overwhelming and can often result in trades being taken that have negative results or missed positive trades, due to a lack of information for a particular currency pair. Unfamiliar currencies may have ridiculous spreads or catalysts based on the information you have limited knowledge of or a lack of news flow out of a particular country.

Finding a balance between diversification and specialisation is optimal. A good strategy for choosing currency pairs would be to choose pairs based on transaction volume and frequency traded. Currency pairs such as the EURUSD, GBPUSD, USDJPY, AUDUSD, and USDCHF, are the biggest traded pairs based on sheer volume, transaction value, and frequency of transactions. Grouping and watching these major pairs is advised.

Currency pairs can be added and removed to your restricted watch list, depending on your preference and how that particular market is fairing. For example, if the Japanese Yen is doing well and is reasonably active or has tight spreads you may wish to add pairs such as the EURJPY and GBPJPY to capitalize on the currency. Similarly, if a particular market is quiet, a trader can remover and add other currency pairs to the watch list.

A watchlist consisting of a handful of currency pairs is advised, including the major currency pairs and others that can be swapped in and out of your watchlist based on their resistance levels, support levels, and catalysts in terms of economic data that will affect them. i.e. data in regard to America will predominantly effect USD currency pairs.

BlackBull Markets, not only includes the major currency pairs but also a variety of over 50 trading instruments, including CFDs, Metals and FX pairs available for you, as the trader, to pick and choose from at your leisure.