What to Trade in Forex?
... I can't tell you what to trade as much as the next person, essentially you need to make that decision yourself ...
Time for another theory article while the markets are quiet, this time on the first question asked by every new trader I see in the chat rooms, "Can someone tell me what to trade?".
Now I can't tell you what to trade as much as the next person, essentially you need to make that decision yourself, not rely on others to tell you what to do, but we can look into how some currency pairs behave to give us a hint into what will suit you.
There is a multitude of currency pairs out there, pick a country's currency, and there will probably be a broker out there trading it, but what we want to look at is the most commonly traded pairs or the majors as they are referred to.
Below is a list of the major currency pairs most commonly offered:
- EUR/USD (Euro/US Dollar)
- GBP/USD (Pound/US Dollar)
- USD/CHF (US Dollar/Swissy)
- USD/JPY (US Dollar/ Yen)
- AUD/USD (Australian Dollar/US Dollar)
- USD/CAD (US Dollar/Canadian)
Now, what do you notice is the common theme through them all? Yep the USD, all the majors either have the USD as the base currency or are matched against the USD.
You will find the above list will also have the tightest spreads (see Forex 101 for an explanation on spreads) with most brokers and will have the biggest daily ranges (difference between the daily high and low).
So what to trade? if you are a beginner trader, without a tested and trusted system in place, it would be best to choose a couple of these pairs only.
More than 2 or 3 will more than likely confuse the buggery out of you, and the last thing we need is to trade confusing (I live my life confused, so I would rather not trade that way ;)).
The GBP/USD (known as the "cable") is very popular amongst traders as it tends to have the highest daily range, giving up more pips in it's moves than any other on average.
The EUR/USD is also popular as it tends to have the smallest spread with most brokers, why the USD/CHF is another that has some substantial movements.
... as you trade you will start to notice the relationship between the different majors ...
Quite often which pairs you choose might be to do with when you trade.
If you tend to trade the Asian session the most, the pairs that include Asian or Oceania currencies would be a good choice such as the USD/JPY, AUS/USD or even, while not a major, the NZD/USD.
Those trading the European session of course might choose the EUR/USD or the GBP/USD, which just about all the majors are ok to trade during the US session.
As you trade you will start to notice the relationship between the different majors, such as how the EUR/USD and GBP/USD tend to mimic each other, and that if the EUR/USD is going down, then more than likely the USD/CHF is going up.
This of course is because they both have the USD as part of their pairing, so if the USD is getting stronger, the EUR/USD will be moving down (Euro getting weaker against a strengthening USD) and the USD/CHF moving up (USD strengthening against the Swissy).
The only exceptions to this relationship will be when country-specific news is released, such as a good economic meter reading in Switzerland might move the USD/CHF but not the GBP/USD and so forth.
Whichever you choose, there is money to be made and lost just as quickly, so be sure to keep your money management tight and your head clear.