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There are several key elements to a successful forex strategy, from identifying your appetite for risk to ensuring that you apply determinism to ensure that you don’t execute rash or emotive trades.
One of the more understated elements is the currency pair or pairings that you choose to trade, as it’s imperative that you identify assets that compliment your strategy and optimise your chances of achieving a profit.
In this post, we’ll ask how you can find such a currency pair, while considering how this choice will fit into your wider strategy.
1. Major vs Minor and Niche Pairs
One of the first distinctions that you’ll need to make is between major and minor (or niche) currency pairings.
There are eight major currencies (namely the US Dollar, Euro, Japanese Yen, British pound, Swiss Franc, Canadian Dollar, Australian Dollar and the New Zealand dollar). Major currency pairs refer to any pair that contains one of these and the USD, creating a total of seven major assets that account for 68% of the forex market’s total volume.
However, there are 170 currencies available in the forex market, the remainder of which are classed as exotic or minor assets. These include widely traded entities such as the Thai Baht and the Mexican Peso, alongside less well-known entities like the Laos Kip and Malawian Kwacha.
The key consideration here is liquidity, as it’s far easier to buy and sell major currency pairs and some exotic assets in real-time. These pairs also benefit from natural supply and demand, so are ideal from the perspective of new forex traders.
2. Identity the Trend
Before you choose from a selection of major and minor pairs, you’ll need to identify the ‘trends’ that define each one. This refers to the overall direction that the market has moved in during the recent past, usually over the course of up to six months.
For example, the GBP/EUR pairing declined sharply for a period of six months following the June 2016 referendum vote, while the same asset has rebounded strongly this week on the back of the largely successful Covid-19 vaccination program in the UK.
Identifying trends of this type and the reasons behind them can help you to make more informed trading decisions, whether you intend to profit from daily price fluctuations or adopt a longer-term investment strategy.
Remember, it’s far easier to analyse and identify trends in some currencies than others, with assets such as the JYP/USD incredibly stable and capable of showcasing predictable movements.
3. Pairing Your Trend With Your Strategy
Now for what is arguably the hardest part, which is to pair your trade and its identifiable trends with the wider strategy that you’ve chosen to adopt.
On a fundamental level, you’ll need to trade trending pairs if you’ve cultivated a trending strategy, as attempting to back sideways pairs (which have showcased no obvious trend or price movement in recent times) will cause you to lose money in this instance.
If you do find a sideways pair that you think you can profit from within a predetermined period of time, you’ll also have to develop a range trading or sideways market strategy to optimise your potential outcomes.
These represent the type of thought process that’s central to forex trading success, as your selected currency pairs and their typical price trends must be matched holistically with your strategy and outlook.
