How To Pick Best Currency Pairs to Trade in Forex
Open charts of at least seven currency pairs.Before getting distracted by the news and the noise from the media, it is always best to take an unbiased look at the charts to see how the markets are doing. Which pairs are under pressure? Which pairs are consolidating? Which pairs are moving up? Is there a specific currency that is behaving the same against most other currencies? This initial, unbiased interaction with the currency pairs on the forex dance floor is important, because it will help you prepare for the next step.
Best currency pairs to trade are the ones trending. Since currencies are always traded against each other, the pair with the strongest trend is led by a strong base currency, and supported by a weaker quote currency. For example, the EUR/USD pair will move in a strong uptrend if the Euro is strengthening and the US dollar is weakening. The AUD/JPY pair will move in a strong downtrend if the Aussie dollar is weakening and the Japanese Yen is strengthening. Sometimes it also works if you pick a currency with a higher volatility against a currency that has been showing consolidation. This way you can base your analysis on the trending currency.
Do Some Technical Analysis
Return to your charts and do a quick technical analysis on your selected currency pairs to find trends or ranges. By doing this you can narrow your choices down to the best currency pairs which are inline with the strongest trends. Polish your technical analysis on these pairs to identify the support, resistance and pivot levels. Go over your portfolio and see if your open positions include the currencies you chose. You'd want to diversify your portfolio as much as possible. If you are already in a EUR/USD trade, it is best to choose a currency pair that doesn't include the euro.
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Narrow down your currency pairs of choice
Depending on your portfolio, trading personality, and the recent global risk events, you can now work your way down to a couple of currency pairs. If you are able to monitor the markets frequently, you can pick the currencies whose economy has an upcoming event risk. If you are going on a vacation and won’t be able to follow the markets for a while, pick a currency whose economy is showing a more stable future. Do the same for the cross currency. Keep in mind that these are all probabilities and trading is never 100% certain. What we are doing here is making the odds work in our favor.
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