Choosing the best pairs to trade
Choosing currency pairs to trade is an obstacle for many aspiring forex traders. Besides outright losses, lesser encounters including picking pairs that don’t move while every other pair is running away. One method to focus on relative strength. This is a concept I have written before including here, here and here.
Forex traders want to select currency pairs that move most. I show you how to pick a strong and a weak currency to form a pair that has most potential.
This is a simple method anyone with a trading platform can use
This is a screen capture from my IG trading platform.
- In this example, I arranged my currency pairs in a consistent manner with forex majors (or your personal favourites) against the JPY. This is an arrangement that makes them good for apple-apple comparison.
- Here you can see columns are ‘Sell’, ‘Buy’ and %Chg’ but you really need the last one only.
- Coincidentally following today’s BOJ event, all the pairs are losing against JPY. This makes JPY the strongest.
- If it is not easy to read, you can re-arrange them. In this picture below, I organised them from least to most losses.
- Since NZDJPY lost the least, NZD is the strongest pair while USDJPY is the weakest.
- You can also read their relative strength of each currency as JPY strongest followed by NZD, AUD, SGD, CAD, GBP, EUR followed by USD as weakest.
How to use?
Which ever currency pair you set out to trade, remember that you are buying the stronger and selling the weaker. The best outcome can be achieved when you match a strong to a weak.
Some combos are sell USDJPY (buy JPY, sell USD), buy NZDUSD. The idea is very simple. When you lay them out on a spectrum, you match two currencies furthest to each other (on both ends) and avoiding the anyones that are right next to each other. Trading currency pairs made of ones next to each other produces the least movement!
Relative strength concept made simple to read by Finviz.com
Points to note
Most common criticisms I encountered are “what if this strength changes” i.e. past performance is not equal to future performance and “short USDJPY? but it already ran away!”
These are not invalid observations but bear in mind that I have merely capture a snapshot of performance today. When you look at currency performance over a longer duration such a week, month or even year to date, you can spot trends and these trends can last a while. Once you spot a trend over a duration which you are convinced will continue, all you have to do is find an entry point.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."