Neither all currencies nor all currency pairs are created equal. Selecting certain currency pairs over others may give you a better chance at success in the foreign exchange (FOREX) market. This article will help you analyze and navigate the uncertain waters of trying to decide which currency pair(s) will bring you the greatest probability of success in trading.
Is the Pair Liquid?
Liquidity indicates whether there are enough participating buyers and sellers in the marketplace to facilitate the trading transactions with ease. If liquidity is lacking, then a buyer may have a tough time closing out the trading position at or near the desired price. The consideration here is whether the international investment community finds the currency pair interesting and profitable enough to trade and to what extent it is desirable. You must determine whether the currency pair is traded in sufficient volume preferably during all three major sessions constituting the 24-hour trading day. Financial journals and brokers can help you with this information.
How Much Is the Spread?
In the FOREX market, brokers are not paid commissions as a stock broker would receive. Instead, they are paid something called the spread. The spread is the difference between the ask (price at which the broker sells to the investor) and the bid price (price at which the broker buys from the investor) of a currency pair. A currency pair that does not have much liquidity tends to have a much higher spread than one which is widely traded. The less the spread, the more money the investor gets to keep. You should look for a currency pair where the normal spread is not more than two to five pips. Incidentally, during important economic news releases such as the U.S. Non-farm Payroll Report (NFP), the spread on the major currency pairs impacted by the report will usually increases tremendously, sometimes up to twenty-five pips.
Behavior of the Currency Pair
Like children and pets, each currency pair seems to have its own unique personality as expressed in its behavior pattern. For example, the EUR/USD (Euro/U.S. Dollar) tends to be more stable than the GBP/USD (Great British Pound/U.S. Dollar). For the scalper or day trader, more erratic movement in a pair may be preferable to movement which stays the trend. If you like trading the news, it will be beneficial to observe how the currency pair reacts to important economic releases like the U.S. NFP report, when sudden price spikes occur in U.S. Dollar-connected pairs.
Top Two Currency Pairs
Despite its general decline in the past several years, the U.S. greenback continues to generate attention from individual, corporate and institutional traders all over the world. Consequently, when paired with other strong currencies like the pound and the euro, it provides fantastic trading opportunities. Based on the liquidity, volume, international interest and overall stability of the underlying governments, the EUR/USD and the GBP/USD are generally regarded as two of the most desirable pairs for trading. Still, you must decide according to your own trading style, analysis and preference which pair(s) will work best for you.
Sandy Robinson, J.D., Copyright 2007
If you are ready to change your future by stepping into the exciting world of trading FOREX, go to http://www.winningtradersassociation.com for more information. Author Sandy Robinson, J.D. is part of the Winning Traders Association, an educational organization founded by John Beiler, President. The organization consists of a network of committed trainers and motivated traders willing to provide support to those interested in trading foreign exchange. Many of the members work from home.