What Forex Pair or Cross to Trade

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Unlike the equity market, where traders have tens of thousands of instruments with which to trade, the Forex market features significantly fewer currency pairs. Competitive Forex brokers typically list 60+ currency pairs. Despite the comparably small choice, traders must choose what Forex pair or cross they should trade as part of their strategy.

We will discuss factors that influence the decision-making process of profitable traders, which could help you decide which currency pairs to focus on in your trading.

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The Forex market is the biggest by volume and is considered the most liquid financial market, with a daily turnover exceeding $7.5 billion, and it remains on track to reach $10.0 trillion daily this decade. It dwarfs the daily turnover of other financial markets, and while the core aspects of trading are similar, successful Forex traders approach this asset differently.

Given the size and liquidity of the Forex market, the bulk of trading strategies are ultra-short term to short-term.

Another reason for the short-term approach to Forex trading is leverage. Traders incur swap rates on leveraged overnight positions if they hold past the cut-off time, usually 17:00 EST. It makes Forex an excellent market to trade but an ineffective one to invest in unless investors use indirect exposure via ETFs. Finally, many traders wish to avoid the volatility and risk overnight positions add to the portfolio, including the drop in liquidity, which causes spreads to widen and potentially these are additional risks to be considered.

The answer depends on several circumstances, and it will differ between individual traders. I will cover the aspects and motions profitable traders go through to help decide which Forex pair or cross they should trade each market session, Asia, Europe, and US.

The importance of an in-depth economic calendar

Economic releases can impact currency pairs significantly. Profitable traders often start their day by looking at an in-depth economic calendar. It provides crucial information on which periods to focus on or to avoid, depending on the trading strategy they wish to deploy on any given day.

Economic reports can cause liquidity to dry up, resulting in wider spreads and slippage, which can mean an increase in trading fees. It can also start new and end existing trends via breakouts or reversals at key price points.

Takeaway:

  • Many traders avoid trading for a period before and after economic announcements that could move markets unpredictably.

The increased volatility following a release can also attract traders, as the price swings can create profitable opportunities for skilled traders. This requires traders to sit in front of their screens as the economic release crosses the wires or employing the use of sophisticated algorithmic trading solutions preprogrammed with logic to take advantage of larger moves.

Takeaway:

  • Most retail traders are at their day jobs during those releases and lack access to algorithmic trading solutions capable of interpreting the release and acting accordingly.
  • The best approach is not to trade the economic releases but to know when it is happening, plan how it could impact price action, and place take profit and stop loss orders accordingly.

Noteworthy:

  • Ignoring economic announcements as a Forex trader is a guaranteed way to face avoidable losses, making an economic calendar the first step in deciding which Forex pair or cross to trade today.

The Forex trading strategy and its role

While the economic indicator can provide a necessary filter of trading periods to monitor and highlight currency pairs of interest for the trading session, the type of Forex trading strategy you use will dictate the most suitable currency pairs.

Here are some examples:

  • Scalpers require the lowest trading fees possible, which automatically narrows the list to a few major currency pairs like the EUR/USD, the USD/JPY, the GBP/USD, and USD/CHF
  • Momentum traders use absolute momentum or relative momentum and either a time series analysis or a cross-sectional analysis to determine the strongest medium-term trends with a short-term approach.
  • Trend followers, an absolute momentum strategy, only use a time series analysis and follow established trends while remaining on the sidelines if no trend is clear.
  • Day traders evaluate longer-term charts and seek opportunities to trade on shorter timeframes, considering all currency pairs, and numerous strategies anchored on technical analysis.
  • News traders attempt to capture the volatility following major economic announcements and schedule their trading session entirely based on the economic calendar releases.

Noteworthy:

  • The USD, the EUR, and the JPY account for 70%+ of all daily Forex trading volumes, and the GBP and AUD round up the Top Five
  • Many traders focus on overlap sessions of the four major Forex centers, London, New York, Tokyo, and Sydney
  • Algorithmic trading accounts for 80%+ of all daily Forex trading volumes

Since most Forex trades are short-term, many Forex traders use technical indicators, chart patterns, and candlestick history to define their entry and exit points. They monitor fundamental factors that may disrupt their trades and plan accordingly. A top-down analysis from a time frame perspective, where Forex traders can identify a broader trend on higher time frames, for example, the H4 or D1, and look for entry and exit opportunities on smaller time frames, like the M1 through M30, is typical.

Many traders stick to their favorite currency pairs, which automatically attaches an emotion to the trade. It creates ideal conditions for failure and narrows the focus of traders. Profitable traders remain flexible and trade the opportunities the market gives them rather than what they try and force.

Every profitable trader has their approach to narrow the list of Forex pairs to trade but starts with a review of the upcoming economic calendar, despite relying on technical analysis. The Forex market is ideal for traders but not well-suited for investors. A top-down analysis is common, and the Forex strategy will define which Forex pairs or crosses to trade.

Should traders have favorite currency pairs?

No, profitable Forex traders remain flexible and trade what the market gives them daily, relying on their strategy and solid risk management.

What is a good approach to select which Forex pairs or cross to trade?

Using an economic calendar and a top-down technical analysis is a good approach, but it depends on the individual and their preferred strategy.

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