3 Pound-Based Pairs, 2 Should Be Traded Now

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3 Pound-Based Pairs, 2 Should Be Traded Now

The Brexit Has The Pound On The Move

If there has been one thing moving the markets over the past two years that has grabbed my attention it is the Brexit. The Brexit is a monumental event for world politics, it is the succession of a major member-nation from the EU. Without doubt, the Brexit is going to have far-reaching implications for the English and that has been fueling a monster debate in Parliament. The debate centers on how the Brexit will occur and has boiled down to what people call The Irish Backstop. The Backstop, effectively, would tie the UK to the EU indefinitely despite a Brexit should there be no clear ending point for other key issues of the exit. The point is to keep Ireland’s border with the UK clear and open, something that might not be possible due to politics beyond my understanding.

The most recent events in the whole Brexit drama are the removal of Theresa May from her post as PM, the election of pro-Hard-Brexit Boris Johnson to PM, and the ensuing inability (and ongoing, lingering, never-ending) of Parliament to make a decision. Needless to say there is no end in sight. When it comes to the pound the dominate factor is that the PMs do not want a hard-Brexit and that is stiffening the Pound. The GBP/USD is one of the more bullish charts I’ve seen in forex for a while and shows an asset on the brink of full reversal. Now that one-month highs have been set above the baseline at 1.2900 it looks like a nice double-bottom formation is in process. This reversal is supported by both indicators so I see at least a near-term type rally unfolding over the next week or so, maybe more. It is possible next week’s FOMC meeting will send this pair shooting higher (maybe lower if the FOMC is less dovish than expected).

The GBP/JPY is in just about the same position, set up for a nice double-bottom reversal. The indicators here are even stronger so I see a decent rally/reversal brewing on this chart. A move higher may hit resistance at 134.00 and 136.00, a move above 136.00 would be very bullish.

The EUR/GBP is also set up for big move but it’s harder to see which direction this one will be. The chart is showing good support at the 0.8925 level but that may become a pivot point. The ECB is meeting this week and largely expected to ease policy and stimulate the economy. this move could weaken the euro and send the pair moving lower, if they don’t do as much as expected or if the moved is baked into prices the pair could move higher.

The Best Currency Pairs to Trade & Times to Trade Them? (Part 1)

Two common questions that I get from aspiring forex traders are: “which currency pairs are best to trade?” and “what are the best times to trade?”

This two-part article will first address the question “which currency pairs are best to trade?”, and next week we will address the question “what are the best times to trade?” You should use this two-part article series as a reference guide to answer any question you may have about which currency pairs to trade and what times to trade them. Enjoy.

Types of Currency Pairs:

There are three categories of currency pairs; majors, crosses, and exotics. The following points will explain which currency pair’s fall into these three categories and the advantages or disadvantages of each.

• Majors

The “major” forex currency pairs are the major countries that are paired with the U.S. dollar (the nicknames of the majors are in parenthesis). We are also including silver and gold in this list since they are quoted in U.S. dollars and we trade them regularly.

EUR/USD – Euro vs. the U.S. dollar (Fiber)
GBP/USD – British pound vs. the U.S. dollar (Sterling, Cable)
AUD/USD – Australia dollar vs. the U.S. dollar (Aussie)
NZD/USD – New Zealand dollar vs. the U.S. dollar (kiwi)
USD/JPY – U.S. dollar vs. the Japanese yen (the Yen)
USD/CHF – U.S. dollar vs. the Swiss franc (Swissie)
USD/CAD – U.S. dollar vs. the Canadian dollar (Loonie)
XAU/USD – Gold
XAG/USD – Silver

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Now, there are some things we need to discuss about the “majors” before we move on to discuss the “crosses”.

First off, many of the major currency pairs are correlated in their price movement, meaning they move almost identical to one another. For example, the EURUSD and the GBPUSD tend to move in the same general direction (not exactly the same), the GPBUSD is typically a bit more volatile than the EURUSD, but if the EURUSD is in an obvious up or down trend you can safely assume the GBPUSD is in the same trend, thus we say they are positively correlated.

The USDCHF is negatively correlated to the EURUSD, so if the EURUSD is moving higher the USDCHF is most likely moving lower. You will find if you take a EURUSD chart and a USDCHF chart of the same time frame and hold one right side up and one upside down, they will look fairly similar, this is because they are negatively correlated.

So what does this correlation business mean to you? It means you need to be careful when making your trading decisions so as to not double up your risk or trade against a position you currently have open. For example, if you enter a long on the EURUSD and the GBPUSD, you are basically doubling your risk, and there is really no point in trading both at the same time, you might as well trade one or the other, if there is a similar price action setup on both, pick the pair that the setup looks more defined on.

Similarly, if you enter a long position on the EURUSD and a short on the USDCHF, you are essentially doubling your risk. I have found the USDCHF to be very choppy compared to the EURUSD and GBPUSD, and I rarely trade the USDCHF as a result, I aim my focus on the EURUSD and GBPUSD if I want to trade a European currency against the U.S. dollar. This is not to say you should never trade the USDCHF, but just be advised that in my experience the EURUSD and GBPUSD provide better price action trading opportunities.

The EURUSD is also the most widely traded pair, and therefore it carries the highest volume of all currency pairs, this also means it is the most liquid, which is another reason I prefer it over its correlated counter-parts. The EURUSD makes up about 27% of forex trading volume, next is the USDJPY at 13%, followed by the GBPUSD at 12% of the total forex trading volume

• Commodity currencies

A commodity currency is a name given to currencies of countries which depend heavily on the export of certain raw materials for income. The major currencies that are also considered “commodity currencies” are the Australian dollar, Canadian dollar, and New Zealand dollar.

Gold and silver are actual commodities, so they can also be considered “commodity currencies”, and once again they are traded in U.S. dollars, as we noted above.

My experience trading the commodity currencies is that the AUDUSD, NZDUSD, gold and silver, are the best to trade, I tend to avoid the USDCAD as I find it fires off many “false” trading signals, this may have something to do with it being heavily influenced by the price of crude oil. Whatever the reason, I typically avoid trading the USCAD and advise my students do the same, perhaps at a point in the future the USDCAD will “behave” more logically, but at the current time I tend to avoid it like the plague.

• Crosses

The “crosses” are those pairs that are not paired vs. the U.S. dollar such as:

AUD/CAD – Australian dollar vs. the Canadian dollar
AUD/CHF – Australian dollar vs. the Swiss franc
AUD/JPY – Australian dollar vs. the Japanese yen
AUD/NZD – Aussie dollar vs. the New Zealand dollar
CAD/JPY – Canadian dollar vs. the Japanese yen
CHF/JPY – Swiss franc vs. the Japanese yen
EUR/AUD – Euro vs. the Australian dollar
EUR/CAD – Euro vs. the Canadian dollar
EUR/CHF – Euro vs. the Swiss franc
EUR/GBP – Euro vs. the British pound
EUR/JPY – Euro vs. the Japanese yen
EUR/NZD – Euro vs. the New Zealand dollar
GBP/AUD – British pound vs. the Australian dollar
GBP/CHF – British pound vs. the Swiss franc
GBP/JPY – British pound vs. the Japanese yen
NZD/JPY – New Zealand dollar vs. the Japanese yen

Now, I am not advising traders trade all of these crosses, there is certainly a short-list of the crosses that I trade and that I recommend all my students trade. That short-list looks like this: AUD/JPY, EUR/JPY, GBP/JPY, and NZD/JPY.

These four cross pairs are the most widely followed and make a nice addition to the major pairs mentioned above. Keep reading and I will condense all of this down at the end and show you how to make a concise “watch list” of currency pairs that you can follow on your forex trading journey.

• Exotics

The “exotics” are those pairs that consist of developing and emerging economies rather than developed and already industrialized economies like the majors. Here is a list of some of the more commonly traded exotics:

USD/TRY – U.S. dollar vs. the Turkish lira
EUR/TRY – Euro vs. the Turkish lira
USD/ZAR – U.S. dollar vs. the South African rand
USD/MXN – U.S. dollar vs. the Mexican peso
USD/BRL – U.S. dollar vs. the Brazilian real

The exotic currency pairs are not the best place to start as an aspiring forex trader, I still do not trade them and there are reasons why. The exotics are much less liquid than the majors and even the crosses. This means there is more risk built into the exotics, this makes them more prone to “slippage” and it also means they have wider spreads than the majors and the crosses.

(Note for total newbie’s; the “spread” is the price you pay your broker for “making the market” for you, it is the difference between the bid and the ask price, you automatically pay this every time you enter a trade, it can be very low on the majors, sometimes only 1 pip, the exotics can have very high spreads that are usually well over 10 pips. Essentially, the spread means you are negative on a trade from the beginning, so you must overcome the spread to get into profit, no sense in purposely putting yourself in the hole 15 or 20 pips by trading the exotics when you can trade the majors and only be 1 or 3 pips negative. Put the odds in your favor)

The exotics can also be much more volatile and thus less reliable than the majors and crosses, due to the thin liquidity in the exotic pairs they can move quite quickly and “jump around” or “slip” much more often than the majors or crosses. There simply is no real reason to worry about or trade the exotics, the majors and crosses provide you with more than enough price action trading opportunities to have a successful trading career. Traders who attempt to trade the exotics often get caught up in analysis-paralysis and are likely guilty of over-trading, they are certainly more susceptible to over-trading. Bottom line; ignore the exotics.

Create your own forex currency pair watch-list:

Now let’s condense this entire article down into some useful information that you can apply immediately to your forex trading routine.

Metatrader 4 has many little nuances that a lot of traders are unaware of. One of them is how to create a “market watch list” of the currency pairs you want to follow. You can also create a “pop up” price list that allows you to get a quick view of the current price quotes of all the pairs you follow, you can adjust the size of this pop up list and it will stay that way so every time you hit F10 you can see all the currencies you follow in large text. Here are the instructions to create a market watch list and a pop up price list in MT4:

Screen shot of my market watch list:

1) Click on “view” at the very top of your screen.

2) Click on “market watch” within the “view” menu

3) You should see a screen appear with some or all of the currency pairs available, and probably gold and silver.

4) Now, right click anywhere in the “market watch” window, you should see a menu appear with various options.

5) This is where you can pick and choose which currency pairs you follow. You will need to first select a currency pair if you want to hide it, then right click and select “hide”, it will now disappear from your market view menu. (note; if you have an open trade you cannot hide the quote of the currency pair from the trade you are in)

6) To reverse this just lick “show all” and all the currency pairs will pop back up.

7) You can also just click on “symbols” and then go through and hide or show which ever currency pairs you want.

8) Once you get your watch list set go to “sets” and save it. You can save multiple watch lists if you want.

9) Hit F10 and a pop-up price menu of your currently opened watch list will appear. This is a handy little short cut that you can use to check the prices of all the instruments on your watch list very quickly so that you don’t have to have the watch list window open all the time.

Now, the pairs that I recommend you include in your watch list are the following: EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY, XAGUSD, and XAUUSD.

This gives you 10 different currency pairs to follow, more than enough to trade with. You really should pick your favorite 4 or 5 of these and follow them very closely and master one forex trading strategy at a time, once you progress you can add all 10 currency pairs to your watch list.

Remember to stay patient and avoid over-analyzing, over-trading, and over-leveraging. Stick to these core currency pairs and master my price action trading strategies and you will be well on your way to becoming a successful Forex trader. Stay tuned for next week’s follow-up to this article where we will discuss the best times to trade the Forex market.

Please Proceed To Part 2 of this Article Here >– Best Times To Trade Forex Currency Pairs

Which Currency Pairs Should I Trade?

One of the biggest mistakes made by many Forex traders is not understanding that deciding correctly what to trade, and in which direction, is 90% of the battle to turn a profit. Unfortunately, too many traders focus on trying to perfect entry methods, not realizing that if you correctly pick what is going to up today, for example, then the exact entry method you use is not going to make a major difference to your trading results. You can become an expert in picking entries on the 5-minute chart, but if you don’t pick what to trade using a broader, higher timeframe perspective, it will be of little use to you. Why do traders make this mistake, and how can they decide which currency pair or pairs to trade each day in a more intelligent way?

Why Traders Don’t Consider Pair Selection Carefully

Most traders are eager to start making lots of money. The way to make lots of money quickly, so they are told, is to trade using smaller timeframes – this is at least theoretically true. Traders notice that some currency pairs have lower spreads (such as EUR/USD) and think they should pick such low-spread pairs to trade to save costs. Another common reasoning is that it makes sense to trade those currencies which are most active during the trader’s preferred hours of operation. A further argument says that each currency pair has its own “personality” and you should get a lot of experience trading a few pairs so you can get to know their personalities well, and in this way, trade them more successfully.

These considerations are both rational and truthful, at least to some extent. The problem is, that they are very far from being the most important consideration that should influence which currency pairs you trade. I learned this myself the hard way some years ago when I decided that I would day trade, the EUR/USD and GBP/USD currency pairs full time. Over several months, these two pairs barely moved, while USD/JPY took off like a rocket and provided easy money to anyone trading it. Sure, I knew the personalities of EUR/USD and GBP/USD very well, had a great strategy which had worked extremely well on these pairs for years, and their hours of greatest activity fitted the time zone of my geographical location precisely. Despite all this, my linear thinking caused me to miss out on the only real trading opportunities of 2020, which came in the JPY pairs and crosses.

The #1 Factor to Use in Deciding Which Pair(s) to Trade

So how should you decide which currency pair or pairs to trade? I’ll use an analogy to the world of gambling to simplify the issue: Let’s say you go into a casino to play a game where you need other players to risk money on the table to give you a chance to make profit, i.e. your winnings will come from their losses. This is a good comparison to the Forex market, which works the same way. So, which table would you go to? The busiest one, with the most players and most money on the table, or a quiet one in the corner with just a couple of players there? Obviously, it would make sense to choose the busiest table. So why should Forex trading be any different? You want to be trading the “busiest” currencies at any given time, you want to be where the action is. Are there any ways to determine that? Well, you could try reading the Forex news to spot the biggest things that are happening in the market now. There’s a place for that, but there are easier ways that can tell you where to begin to focus your search. Although Forex is “over the counter”, there are reliable statistics which tell us which currencies are traded the most, i.e. which currencies are exchanged in the largest volumes. The takeaway headline is that today, about 70% of all Forex trading is between the U.S. Dollar, the Euro, and the Japanese Yen only. The British Pound and Australian Dollar account for another 10%. The U.S. Dollar is by far the most dominant of all these currencies, so it makes sense to focus on each of the other currencies against the U.S. Dollar. You don’t need to open your trading platform and worry about 80 pairs and crosses or wonder whether the Canadian Dollar / Swiss Franc cross is what you should be trading today. It almost certainly isn’t, and if you ever hear anyone telling you about a support or resistance level in a currency cross like that, please ignore them – nobody is watching this cross or its levels!

Narrowing Down the Field

Now you know that it is only worth watching a few currency pairs, you will find it much easier to know which one or ones to be trading any day. The method to use to answer this question in detail, is which of these currency pairs are likely to have the most volatility? You need volatility, because if the price does not move, how are you going to make any money? You need to buy and sell at the widest price differentials you can possibly find, to make the greatest possible profit. There are a few ways to forecast where market volatility is likely to be, and if you apply the methods I outline below, you should get some good answers.

The first thing to know is that statistically, in markets, volatility “clusters”. Suppose the average daily range of a currency pair is a movement of 1% of its value, taken over several days. Suddenly, one day it moves by 3% of its value. Volatility clustering research conducted by data scientists such as Benoit Mandelbrot tell us that this pair is more likely to move by something more than 1% tomorrow, quite possibly actually by an amount closer to 3%. So, when you see a currency pair move by more than its average volatility, that high volatility is more likely to continue than reverse over the short term. Another approach could be to calculate the average true range (ATR) of the past 5 or 10 days for EUR/USD, GBP/USD, and USD/JPY, and calculate these values as percentages of each pair’s price from the start of the period. Whichever has the largest value, is probably the pair it makes sense to focus on tomorrow.

Another crucial factor is trend, or momentum (they are essentially the same thing). The major currencies such as the U.S. Dollar, Euro and Japanese Yen, have, in recent years, shown a greater probability to move in the direction of their long-term trends. One good rule of thumb in trading major currency pairs is asking yourself, is the price higher or lower than it was 3 and 6 months ago, and trading mostly or entirely in the same direction as any long-term movement, if it exists.

If you are trading only during Asian business hours, you will probably find that your best opportunities will involve Asian currencies such as the Japanese Yen and Australian Dollar. I urge you to consider whether you can develop a method to trade longer time horizons, as otherwise you could be missing other opportunities while you are asleep, the same way I missed out on USD/JPY opportunities in 2020. If I had the wisdom to trade daily charts back then, I could have profited from that big movement in the Yen very easily, even at night while I was asleep, with traders in Tokyo doing the heavy lifting for me!

Finally, if you watch an economic calendar to see when the major central bank or most important economic data releases are scheduled for the major currencies, you can see that if you are in a trade before those releases, those releases might provide you with the volatility you need to turn your trade into a big winner, or at least show you where some volatility is likely to appear.

So, narrow your focus to the major pairs, and trade the currencies showing the highest volatility, and watch where the bigger long-term trends are. This should give you the best chance of success in Forex trading.

Adam Lemon

Adam Lemon began his role at DailyForex in 2020 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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