Hello traders! In every Online Trading Academy class that I teach, the question always comes up as to what is my favorite currency pair to trade. The answer-like many in the wide world of trading-is, “it depends.” In this week’s newsletter, we’ll discuss what it takes to be a favorite, why it changes, and what to look for when trying to find pairs to trade.
First of all, what makes a currency pair a good one to trade? There are really two components to this. The first should be obvious-volatility! As a trader, I basically need volatility (movement) of a pair to hope to make any money trading in the spot forex market. There isn’t much worse to a trader than to get into a position and watch it slowly wiggle back and forth, up 10 pips, down 10 pips, up 5, down 5, you get the idea. My preference would be to have at least 100 pips a day of movement, if not more! As of the time of this writing, the majors are all languishing with very low volatility. I personally measure the daily ATR to “find” where the action is. ATR is the Average True Range, very basically measuring the average high to low (the range) over a certain number of days. Most platforms default to 14 periods, which is what I use for this purpose. Currently, the majors have the following daily ATR: EURUSD 46 pips; GBPUSD 60 pips; AUDUSD 51 pips; NZDUSD 49 pips; USDCAD 40 pips; USDCHF 34 pips; USDJPY 41 pips. Looking back at the past few years on these pairs, you would see that we are at the very low end of their ranges of volatility. The bad news is we have much smaller profit targets with this low volatility. The good news? Since we are at the low end of the range, much higher volatility is right around the corner! I hope.
The second component of what makes a good pair to trade is the spread. Having a 100 pip ATR doesn’t do me a lot of good if the spread is 50! Obviously an extreme example, but you get the idea. Very generally speaking, I would like to see a ratio of the spread to the daily ATR of about 1:50 or more. What this means is that if a particular currency pair has a spread of 2 pips, I would like to see at least a 100 pip ATR. Often this is very easy to achieve, but in our current market, not so much!
So why does my “favorite” currency pair change? When one pair loses volatility while another gains, I might switch my favorite from the first to the second. An example of “becoming a favorite” would be the EURCHF cross pair. Back in mid-2011, this pair saw its daily ATR rise from a pleasant 100 pips a day to 400 a day! The main cause of this was the European debt crisis made many people think the EUR currency was going to go bankrupt/disappear, and many traders ran to the relative safe haven of the CHF. The Swiss central bank flipped the switch, and caught many off guard. They decided to “peg” the CHF to 1.2000 on the EUR, and the daily ATR fell all the way to about 5 pips a day! Obviously, trying to trade a pair with that low of volatility is nearly impossible, so it certainly wasn’t my favorite anymore! Currently the EURCHF pair has an ATR of about 19. Still, not good enough for my money!
If the majors aren’t offering up very high ATR readings, it’s time to look at cross pairs. My recommendation in class is to stick with one major currency versus another major currency. A few JPY pairs: EURJPY 57pips, GBPJPY 80 pips, AUDJPY 59 pips. A few GBP pairs: GBPAUD 109 pips, GBPCAD 87 pips, EURGBP 28 pips. And a few EUR pairs: EURAUD 84 pips, EURCAD 63 pips, EURNZD 84 pips.
So now I have a short list of pairs to keep an eye on, and a few to avoid for now. In my weekly to-do list, I go through this exercise to see which pairs I should start to focus on and which to avoid. You do have a to-do list, right? In class, I give out my daily to-do list, which is kind of like a pilot’s checklist before she flies an airplane. My weekly list includes checking the daily ATR, checking an economic calendar for major events like interest rate decisions, etc. Hopefully this newsletter helps you avoid some of the quiet pairs, and get you focused on the pairs that have some pips in them!
Until next time,