How to Choose Which Pairs to Trade With - The Ultimate Guide!
Everyone always asks when they start out "which pairs should I choose to trade with" as there is a long list of currencies. So let's break it down:
1. The currency market is the most liquid market place in the world, but that's not the case with ALL currencies. In fact, the US Dollar is involved in around 90% of all trades that occur in the market and therefore it's what we call the most "liquid". Liquidity refers to how easy it is to exchange assets into cash or vice versa. For example, the US Dollar has upwards of a trillion dollars a day in volume which translates to an unimaginable number of traders ready to buy or sell at any given price at any given time, so it's very easy to fill a trade at the amount and price you want. For a less liquid market, such as an altcoin in cryptocurrencies, the liquidity is a lot thinner which means it's not as easy to fill a trade at any given price. Trades are filled when your broker matches your buy order to a sell order(s) of equal amount. When the market orders to buy exceed the limit orders to sell at any given price, the broker will quote a higher price to attract sellers. If the market is liquid like the dollar, the price will move up a tick or so, but if the price is illiquid like an altcoin, it can run up several pips which is why crypto fluctuates so much. So what does this mean for me when I choose a currency pair? It means that the more exotic you get in your choice such as the USDZAR vs EURUSD, the more volatility, unpredictable and volatile trading conditions you will get. Since we use leverage in the currency markets, we want very liquid pairs and very predictable, stable market conditions which brings our currency pool to EUR, USD, GBP, JPY, AUD and Gold is good too.
2. You should not be trading every single variation of the currency list provided above. There is 0 point having both EURUSD AND GBPUSD or USDJPY, EURJPY AND GBPJPY on your list because of correlation. Correlation means these currencies will move together because in the real world currencies aren't exchanged in pairs, they are singular. When I want to make an investment in the U.S. or if I go an visit New York, I'm not going to the exchange counter asking can I sell my EURUSD currency... no, I sell my Euros and I buy USD in return. So since we know the USD is responsible for 90% of currency trades, if EURUSD is moving up it's a result of the USD being weak unless the Euro has had a signficant news event. In that case, GBPUSD will also move up with it. If you ever find yourself buying EU and selling GU at the same time, you'll lose that more often than not. The exact same happens with the Yen pairs.
3. AUD, CAD are commodity currencies whereby their value comes from the investment purposes their economies are pegged to. AUD is commodity rich in a lot of things so analysing conditions in the commodity markets will give you an idea of it's strength. CAD is based off oil and when oil is up, CAD will be up. So there's no point having Oil and Gold and all these other commodities open along with USDCAD, XAUUSD and XTIUSD.
Based on the above, we can wittle about 20 different signifcant currency options down to a handful of choices which are as follows
1. EURUSD or GBPUSD
2. USDJPY or EURJPY or GBPJPY
3. EURAUD or GBPAUD or AUDUSD
AND
4. USDCAD or EURCAD or GBPCAD
OR
5. XAUUSD and XTIUSD (oil)
You shouldn't really have more than 4 to 5 pairs that you know inside out being traded at any given time. If you are looking for more opportunities, branch out into indices such as the S&P or maybe BTC, both are correlated.
1. The currency market is the most liquid market place in the world, but that's not the case with ALL currencies. In fact, the US Dollar is involved in around 90% of all trades that occur in the market and therefore it's what we call the most "liquid". Liquidity refers to how easy it is to exchange assets into cash or vice versa. For example, the US Dollar has upwards of a trillion dollars a day in volume which translates to an unimaginable number of traders ready to buy or sell at any given price at any given time, so it's very easy to fill a trade at the amount and price you want. For a less liquid market, such as an altcoin in cryptocurrencies, the liquidity is a lot thinner which means it's not as easy to fill a trade at any given price. Trades are filled when your broker matches your buy order to a sell order(s) of equal amount. When the market orders to buy exceed the limit orders to sell at any given price, the broker will quote a higher price to attract sellers. If the market is liquid like the dollar, the price will move up a tick or so, but if the price is illiquid like an altcoin, it can run up several pips which is why crypto fluctuates so much. So what does this mean for me when I choose a currency pair? It means that the more exotic you get in your choice such as the USDZAR vs EURUSD, the more volatility, unpredictable and volatile trading conditions you will get. Since we use leverage in the currency markets, we want very liquid pairs and very predictable, stable market conditions which brings our currency pool to EUR, USD, GBP, JPY, AUD and Gold is good too.
2. You should not be trading every single variation of the currency list provided above. There is 0 point having both EURUSD AND GBPUSD or USDJPY, EURJPY AND GBPJPY on your list because of correlation. Correlation means these currencies will move together because in the real world currencies aren't exchanged in pairs, they are singular. When I want to make an investment in the U.S. or if I go an visit New York, I'm not going to the exchange counter asking can I sell my EURUSD currency... no, I sell my Euros and I buy USD in return. So since we know the USD is responsible for 90% of currency trades, if EURUSD is moving up it's a result of the USD being weak unless the Euro has had a signficant news event. In that case, GBPUSD will also move up with it. If you ever find yourself buying EU and selling GU at the same time, you'll lose that more often than not. The exact same happens with the Yen pairs.
3. AUD, CAD are commodity currencies whereby their value comes from the investment purposes their economies are pegged to. AUD is commodity rich in a lot of things so analysing conditions in the commodity markets will give you an idea of it's strength. CAD is based off oil and when oil is up, CAD will be up. So there's no point having Oil and Gold and all these other commodities open along with USDCAD, XAUUSD and XTIUSD.
Based on the above, we can wittle about 20 different signifcant currency options down to a handful of choices which are as follows
1. EURUSD or GBPUSD
2. USDJPY or EURJPY or GBPJPY
3. EURAUD or GBPAUD or AUDUSD
AND
4. USDCAD or EURCAD or GBPCAD
OR
5. XAUUSD and XTIUSD (oil)
You shouldn't really have more than 4 to 5 pairs that you know inside out being traded at any given time. If you are looking for more opportunities, branch out into indices such as the S&P or maybe BTC, both are correlated.