One of your first and biggest decisions as a Forex newcomer: which currency pairs to trade?
When you’ve decided to dive into the world of Forex, this one is a biggie. Which currency pair?
You want to choose well, because you and your currency pair are gonna spend a lot of time together.
When I started out trading, I was focused on the EUR/GBP. It has been an interesting politcal and economic ride over the past ten years. And I definitely felt like I was riding the highs and lows along with the Euro.
First of all, what is a currency pair?
This gets us right to the heart of making money on Forex: you buy or sell one currency in relation to another.
It’s the very basics of Forex trading. Take, for example, the EUR/GBP as your chosen currency pair. When you choose to make a trade, you’re taking a risk on the relative values of those two currencies.
If you buy, you’re hoping that the Euro will rise in value against the Pound, and you can sell it at a profit. If you sell, you’re hoping the Euro will fall in value against the Pound; then you’ll be able to close the trade with a profit.
The 7 main currency pairs are those involving the US Dollar. The main 4 are called the “majors”:
EUR/USD (the euro)
GBP/USD (the cable)
USD/JPY (the ninja)
USD/CHF (the swissie)
There are then 3 other currency pairs involving the US Dollar:
NZD/USD (the kiwi)
USD/CAD (the loonie)
There are, of course, lots of other currency pairs. Some of the main pairings are:
So, which currency pairs to trade when you’re a Forex beginner?
There’s no right or wrong here, but it’s definitely an important decision.
Here are 3 questions you need to ask yourself:
1. Do enough people trade this currency pair?
Currency pairs need a decent volume to make for relatively stable trading conditions. The market operates better with decent liquidity.
When you’re a Forex beginner, it can feel tempting to stay away from the main action. You’d rather sit at a quieter table first and see how it all works.
But that is what your demo account is for. We recommend setting up a demo account through Think Markets and spending several months getting to grips with how to trade.
If you choose a currency pair with low market liquidity, it willa ctually be more difficult to succeed. With too few people trading, a pair can behave erraticly.
The lurches in buying and selling are even more unpredictable and the transaction costs are higher.
You need to start out with a currency pair with good market liquidity.
2. Is the currency pair active when you are available to trade?
So, having established that your chosen currency pair has enough liquidity, our second question is about the times of the day when you are hoping to trade.
Is this the right time for your currency pair?
Of course, the Forex Exchange market is open 24 hours a day. But in fact, the trading day follows the 4 sessions when different trading centers around the world are the most active.
The 4 locations are:
These are the trading times of the 4 sessions:
Sydney 7am – 4pm
Tokyo 9am – 6pm
London 8am – 4pm
New York 8am – 5pm
Please note these times are given in local time – remember to check with your own time zone.
Also, watch out for Spring/Fall time changes.
So, here’s the question behind the question – will enough people be trading your chosen currency pair during the session when you are planning on trading?
For example, if your currency pair is USD/JPY, but your time for trading is the start of the London session, then you wouldn’t expect so much liquidity and movement in the price.
Most people trading USD/JPY are focused on the New York and Tokyo sessions. So that’s the best time to trade the USD/JPY.
One of the interesting things to observe is the overlap between the sessions. That’s when the liquidity can really make things interesting.
3. Are you able to easily understand the political and economic context for this currency pair?
When you’re choosing a currency pair, remember you need to understand the context for the currencies. Is it easy enough for you to understnad the political and economic contexts for both the currencies, and the relationship between the two?
Of course, you can find out anything with appropriate research. But it really does help if at least one of the countries is really familar to you.
Remember to keep on top of trading news with a decent trading calendar. That way you can see what events and announcements are forthcoming which will have an impact on the market. You can closeyour trades or make decisions accordingly.
As a beginner, it’s really not recommended to jump into trading the news. But it’s definitely a great learning opportunity – to sit and watch what happens to the market during significant trading news.
When you have made a measured decision about which currency pairs to trade as you start out trading Forex, remember to get practising on your demo account. Get to know the history of the currency pair, and any forthcoming significant events. Remember to analyse your own availability to trade, to check it’s the right fit for you.