A choice of a currency pair for a trade

When I was reading Beat The Odds In Forex Trading by Igor Toshchakov, there is one chapter about the idea of 'What currency pair should be traded for short-term intraday trader'. You can read that particular chapter here. Happy reading!

When making a choice of a currency pair for a trade, no other reasons except the practical ones should be taken into consideration. It always surprises me when I see that some traders choose a currency pair for making a speculative trade, based on patriotic or geographical reasons. I have noticed that many traders from Australia, for example, basically trade an AUD against USD or NZD. New Zealanders, Canadians, Frenchmen and many traders from several other countries frequently prefer to trade their national currencies also. They trade it against the American dollar, or against other national currencies of neighboring countries of the given geographical region. It seems to me, though, that our basic purpose of participation in this business is not to certify our patriotic feelings and pride but only to receive the greatest possible profit. From the point of view of a speculative trader, the patriotically geographical approach to a choice of currency pairs for speculative operations on FOREX cannot be considered rational and justified. The choice of a currency pair for the following speculative transaction should be done according certain parameters, and patriotism and residence are not among them.

The most important and final criterion when making a choice of a currency for short-term speculative trade should be maximum conformity of a current technical picture, and how it fits to a trading technique and/or to a trading system which you’re going to use.

The basic criteria for a choice of currency pairs should be their liquidity, activity and average amplitude of fluctuations (trading range). The higher all these parameters, the more preferable such currency pairs are from a speculative trader’s point of view. The list of currency pairs most suitable to such a definition first of all includes the following: USD/CHF, USD/JPY, EUR/USD, EUR/JPY, GBP/EUR, GBP/JPY and CHF/JPY. You may be surprised that I have not included in this group Cable (GBP/USD). The reason is that this currency pair has almost ideal liquidity as well as all other “majors”, but the average day amplitude of Cable fluctuations is lower than would be desirable. Also, the small cost of a GBP/USD pip is from my point of view better for an intermediate term positional trade, than for short-term intra day speculations. (Sometimes I also trade it, but not very oftern.)

The most important and final criterion when making a choice of a currency for short-term speculative trade should be maximum conformity of a current technical picture, and how it fits to a trading technique and/or to a trading system which you’re going to use. As in this course we talk particularly about my trading technique, just the maximum conformity of the chart to one of the templates used by me becomes a determining factor for a choice of a particular currency for a particular trade. It is especially important if in the given moment the market is in immediate proximity to some key technical level. I accept diversification and, from my point of view, it’s possible and necessary to trade various currency pairs. However, my personal practice shows that having simultaneous positions on various currency pairs disseminates a trader’s attention. It’s rather difficult to follow all the currency pairs at the same time. Therefore, I simultaneously hold open positions on no more than two or (very seldom) three currency pairs. In some cases (for example, trading USD/CHF and EUR/USD), I frequently use “substitution”. By substitution I mean analyzing one of them, but (on the basis of this analysis) trading the other one.

The Swiss franc basically doesn’t have its own brightly expressed identity in the marketplace. On a large scale, it is not more than a “proxy” in relation to Euro. At the same time, it has high activity, large amplitude of fluctuations and perfect liquidity. These “qualities” allow USD/CHF to be one of the most attractive currency pairs for speculative trade.

p/s : You can download Beat The Odds In Forex Trading by Igor Toshchakov ebook at Download Section in sidebar.