One of the essential things in trading is to choose the right currency pair, combined with the right trading strategy. Choosing the right one may get huge profits while selecting the wrong pairing will cause losing money. This is one of the similarities between the foreign exchange market and the stock market: we are trading currencies, not individual stocks.
First of all, what is a currency pair? It is a quotation of two different currencies that constitute a currency exchange rate and serve as the object of foreign exchange operations.
Using these pairs to trade means that the trader sells or buys the base currency relative to the quote currency. However, things are not as simple as they sound.
There are three main factors to consider when choosing your pair in the foreign exchange market.
First, you need to determine whether the pair is a trending pair or a non-trend pair; Second, you should figure out the type of strategy you will be trading; finally, you need to know the actual average range of the currency pair.
Let’s analyze these three significant factors together and explain in detail how you can choose the perfect trading pair.
Identify the trend of currency pairs
When choosing a pair to trade, the first thing you must do is to identify the trend. The trend is defined as the overall direction of the market’s recent trends. You can identify trends by using trend lines or applying moving averages (MA) to the chart. If the currency pair is not trending, paying attention to the sideways trend is essential before deciding which pair to trade.
Match your trend with a trading strategy
The next step in finding the right currency pair to trade is to ensure that these pairs conform to the strategy you intend to trade. If you are trading with a trend strategy, your currency pair must be a trend currency pair. Though if you try to trade a trend strategy on a sideways currency pair, you will have a failed strategy.
If you have a trend strategy and identify a trending pair, your chances of becoming a profitable trader will significantly increase. In addition, if you find that a pair has been moving sideways for some time, it is crucial to choose a range trading or sideways market trading strategy to match these pairs.
You can apply multiple strategies for each currency pair, but it is important to understand the behavior of each pair before trading. Many traders make the mistake of matching the right currency pair with the wrong strategy.
Pay attention to ATR
The average true range (ATR) is the average change in points in a day. ATR is essential because you are likely to hit a stop loss if you do not know the average volatility of a pair of currency pairs. This is important when determining the currency pair you want to trade based on your strategy and trading goals.
Suppose you are an active trader who is scalping and trying to get a high percentage of profit in a short period. In that case, you will need to pay special attention to currency pairs with high ATR because they can fluctuate significantly, so you don’t want to. The stop loss is too tight. Understanding the average true range of pairs and the strategy you plan to trade has a significant impact on the success or failure of your trading.
Most traders neglect to choose the pairs carefully they trade and believe that they can change any currency pair with any strategy.
However, this kind of trading attitude is one of the main reasons rookies money, so don’t make the same mistake of matching the wrong pairing/strategy.
If you are a beginner, it is recommended to start trading with major currency pairs: USD, EUR, JPY, CHF, GBP, NZD, AUD, CAD.
Thus, use this information, do research, pick up the most suitable pairs and trading strategies, and then join the forex market. We wish you great luck with your forex trading.