Forex trading is becoming increasingly popular among amateur and part-time investors who want to earn a little extra money on the side.
Getting started in Forex trading is no easy matter – there is a lot to learn and the trading environment can get pressurised and a little stressful, meaning that carefully planned strategy can become forgotten in the heat of battle.
It is useful, then, to break up all the theory and strategic analysis into bite sized pieces. One day you can spend time really analysing the indicators and how they impact on one another, and another day you can focus on areas such as volatility, how best to assess it, and equally importantly, what to do with the information when you have it in front of you.
The fundamental question of currency pairs
But perhaps there is an even more fundamental point you need to spend some time thinking about. There are hundreds of currencies out there, and that means thousands of currency pairs. So which are the best currency pairs to trade in 2018? Beyond that, how are we defining “best” and what metrics are we using to assess it? Let’s dig a little deeper and try to find out.
Stick to the basics
OK, there are plenty of exotics out there, and if you really want to start trading Danish Krones, nobody is going to stop you. However, when you are starting out in Forex, the KISS principle has a lot going for it. More than 85 percent of trading takes place around the following eight currencies. Unless you have a compelling reason to do otherwise, or some inside knowledge, you are best off focusing your attention here:
- US dollar (USD)
- Euro (EUR)
- Japanese yen (JPY)
- British pound (GBP)
- Australian dollar (AUD)
- Canadian dollar (CAD)
- Swiss franc (SFR)
- Chinese Yuan (RMB)
Of course, that still leaves you 28 currency pairs to choose from, but it is better than several thousand. While you are finding your feet, you can actually reduce the shortlist even further. From the above currencies, there are eight combinations that are most commonly traded:
While you should definitely look to broaden your horizons over time, there is something to be said for restricting yourself to these basic eight pairs while you are starting out on your journey as a Forex trader.
Follow a strategy
So let’s say that you are going to focus your attention on just those eight currency pairs, at least to start with. If you follow a set routine, it will soon become second nature. It might go something like this:
1) Open up the charts
First job, and one that can easily be done while you enjoy your morning coffee and croissant, is to open up the charts for each of those eight pairs and see what they are doing. Do this before you switch on Bloomberg, or your news channel of choice, and form your own view on what’s happening. Which pairs are performing better? Is there a particular currency that is going the same way against all the others? The fact that there are only eight pairs in your mind means you’ll have a clear conceptual idea of what each pair is doing, much like watching eight couples moving around a dance floor together.
2) Check the news
Now you’ve got some context in mind, you can switch on the tube! What’s happening in the world? A stock market in free fall? A rise in interest rates? Political uncertainty or posturing that could have financial repercussions? This will give you an idea of any markets that are likely to be facing significant volatility. And as a rule of thumb, volatility is something to be avoided, at least when you are just starting out.
3) What are the experts saying?
There is nothing wrong in being guided by experts. Anyone who has made lots of money trading Forex is likely to be worth listening to, so check out some of the most influential blogs in the Forex world, and find out what the thought leaders have to say about the currency pairs that are appealing to you.
4) Do your analysis
So far, you’ve been working on a diet of gut feel and rumour. That’s fine, but now’s the time to back it up with some solid and scientific analysis. Run through your favourite indicators on your chosen shortlist of currency pairs and see if they correspond with your way of thinking.
5) Only dead fish go with the flow
Ultimately, you must have the courage of your convictions. One of the biggest challenges in Forex is spotting when a change is coming, and daring to be different. There are two factors to keep in mind here. The first is that you won’t always get it right. That’s OK, nobody does. The second is that when you are on the money, you will feel on top of the world. So stick to your strategy, manage your risk, but don’t ignore that all important gut feel.