To succeed as a trader, you need to trade the currency pair that allows you to optimize the potential of your trading strategy. Choosing the right one can be daunting because there are many factors to consider. But, we have done the research for you, and in this article, you will learn five steps to choosing the right currency pair every time.
5 Steps to Choosing the Right Currency Pair
Step 1: Create a Watchlist
If you’re not sure which pair to trade, then you can begin by putting all your favorite ones into a watchlist. Creating this watchlist helps you focus on the specific pairs you’ve spent time studying, giving you a better chance of choosing the right one out of the selected few. You can create a watchlist by selecting the pairs you love trading and putting them in a special category and you can do this on forex brokers like Oanda. Many new traders find it difficult to focus because they keep trying to trade a lot of assets at the same time. This is usually a consequence of greed and the desire to profit from all price swings in the currency market.
Your watchlist should contain currency pairs that possess desirable characteristics. Of course, there isn’t a hard and fast rule about this because you need to choose the characteristics that work best for you.
Step 2: Review News and Economic Data
Once you’ve created a watchlist, you need to review the key economic reports and news data associated with your selected currencies. The goal is to understand the likely direction of price movement from a fundamental perspective. Getting micro and macroeconomic reports can guide your trades and technical analysis. Key factors like inflation, GDP (gross domestic product), CPI (consumer price index), and exchange rate significantly impact the movement of currencies. New traders are likely to fall into the trap of rushing into technical analysis without understanding the forces that drive price movement.
Reviewing news and economic data also helps to prepare you for the trading day because news releases can lead to price spikes and market gaps. Being aware of upcoming news keeps you ahead because you’ll have enough time to plan your trades accordingly.
Step 3: Carry Out Technical Analysis
Fundamental analysis allows you to understand the forex market from a broad perspective. Technical analysis, on the other hand, is a great way to find the best trade entries and exits in line with your bias. Before analyzing price charts, make sure you understand the micro and macroeconomic situations. This helps you filter the pairs on your watch list and ensures that you only trade currency pairs whose technical and fundamental analyses align.
You may use indicators, chart patterns, or trading theories (support and resistance, Elliot waves, smart money concepts, etc.) to examine price charts and get the optimal price levels or key levels that guide your trade execution and management.
Step 4: Carry Out Intermarket Analysis
Intermarket analysis is a great way to add confluence to your trades. It isn’t compulsory for all traders, but it’s a great way to increase your win rate by increasing your probability of making profits. To do this, you have to examine financial assets correlated with the currency pair(s) that you’re trading. This correlation could be positive or negative – the goal is to confirm the movement of a currency by a corresponding movement of another asset. For instance, if you’re trading the Canadian dollar, you can examine the oil market to determine whether the Canadian dollar gets stronger as oil prices increase. If you find two positively correlated assets poised to move in the same direction, your trade has a higher chance of being profitable.
Inter market analysis can also be done with currency pairs. For example, if the EUR/GBP currency pair is in an uptrend while the dollar is weak, you should consider buying EUR/USD and not GBP/USD. The uptrend of EUR/GBP shows that the Euro is currently stronger than the pound. Hence, EUR/USD will have a stronger uptrend than the GBP/USD pair due to the weakness of the British pound. This analysis can help you trade the right currency pair while trading correlated assets like the Euro and the Great British pound.
Step 5: Consider the Trading Session
The forex market is open all day long. However, there are different trading sessions with different levels of volatility and liquidity across all pairs. If you’re trading the London and New York sessions, then major pairs, CAD and CHF pairs, will be volatile. In the Asian session, JPY, NZD, and AUD pairs are usually more volatile than others.
Finding the right pair to trade might be challenging at first, but as you practice these five steps, you’ll improve and get better trading results as you constantly choose the right currency pairs.
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