There is no one right way to select a currency pair. However, when we look at our objectives, there are some things we need to do before we can choose the right currency pair.
In the foreign exchange market, we need to first establish that an investment will be profitable.
At first, the idea of trading currency pairs may seem intimidating. There are many different currency pairs to choose from, and there are several factors you have to take into account when choosing a pair to trade.
However, once you understand how to select trade pairs, it will become second nature. The process of deciding which currency pair to trade is actually an easy one.
Steps involved in choosing a currency pair
- Decide whether you want to be bullish or bearish on the market
When you’re about to buy or sell a currency, there are several factors you need to consider. You’ll want to decide whether you’d like to be bullish or bearish on the market; you’ll need to ask yourself if you think that a particular currency will go up or down in general; and once you’ve made your decision, you’ll need to find the right trading pair with the correct amount of leverage.
- Decide on the type of approach you would like to take
Before you get started on your analysis and make any trades, you need to consider what type of trader you want to be. There are three main types of trading styles that are used in the forex market, and you need to decide which one will work best for you:
- Swing trading
- Position trading
These three strategies each have their own characteristics and goals that are vastly different from one another. Scalping is about making many small profits, swing trading is about making fewer larger profits, and position trading is essentially about holding a currency pair over a long period of time until its price has matured into a profitable trend.
- Choose a timeframe for your strategy
If you’re looking for a short-term trade, look for the most volatile pairs. Volatility usually indicates that the market is uncertain about where the prices will go—this means that there are higher chances for change than for stability. On the other hand, if you’re looking to buy and hold for the long haul (like many investors like to do), then you’ll want to look for currencies with a lower volatility index.
- Determine net capital gains and losses for the last three years from our trading activity
The net capital gain is simply the total profits of all our trades, minus any losses. It is important to take into account all trades, including those that occurred outside of MT5. In other words, don’t just look at what you made from MT5 because there could be trades in the paper market that offset your gains or losses in the electronic market (and vice versa).
- Determine the amount you want to trade
Once you have your net capital gain and loss figures, you can use them to determine how much money you are willing to risk on a trade based on your risk tolerance and portfolio allocation. This is done by dividing your total net capital gain by 2 (or 3) and then subtracting it from 100% (but never go below zero). This percentage represents your maximum acceptable risk level for each currency pair.
- Research the available currencies and their characteristics
When it comes to selecting the currency pairs you’re going to trade, you have to know that there are a variety of factors at play. So what can you do to help ensure that you make the wisest choice? First, don’t neglect your research. Information is your best tool for making smart decisions about which currency pairs will be best for you.
- Find a money management system that works for you
A money management system is what will keep you in check when the going gets tough. It’s easy to get greedy and enter a trade that will cost you thousands of dollars if you’re not careful. Your money management system is there to remind you not to take risks that could wipe you out completely.
Things To Consider in Selecting Trading Pair
There are many factors to consider when you’re trading currency pairs. The most obvious is the actual currency pair, which is the first thing you select when looking at the list of available pairs on any given exchange. But what about the second part of that pair? What about the currency you’re buying and selling in order to make a profit?
- Consider your goals: Do you have a short time horizon or are you looking for a long term position?
- Know your expiry times: There are different expiries on every trade; if you don’t know where to find them, ask someone.
- Understand the volatility of each pair: A few examples here, USDC USDT and BTC USDT are considered low volatility while GBP/USD and USD/CAD are known to be higher volatility pairs. You may be able to get better fills on larger pairs with high volatility but you need to base this off your own risk profile, something your broker can assist with.
- Think about how much leverage will suit your preferences: High leverage paired with high volatility will give you less room for error and vice versa.