How to choose what FX pairings to trade

The last couple of weeks have been steady for the fund.

The currency pairings that we trade were increased again from several to a couple of dozen.

I wouldn’t view so many if I weren’t working with a full-time analyst—someone to take the analytical strain.

Indeed, when James was on paternity recently, we felt it prudent to reduce our traded pairings significantly.

How do we choose what to trade?

Many traders would reduce to the obvious, which are those pairings with the lowest spread.

As a reminder, the spread is the broker’s charge. If for example, we traded NZD/CAD (that’s the New Zealand dollar and how it fares against the Canadian dollar) that particular pairing would most probably have a high spread in comparison to others we trade.

If we entered an NZD/CAD trade and exited immediately, we would have a high cost relative to, say, trading the EUR/USD.

However, it is not only spread size that counts.

The experienced trader is looking for trades that provide an edge: (1) The market cycle of the pairing; (2) consistency or recent predictability measured against our recent success in that pairing; and, (3) the size of tails on bars on our time frame and over a relevant timespan. These would be a few things that we’d consider.

With the last point, some currencies are commodity-based. Hence short-term volatility at times. Moreover, some money markets and associated pairings are more active over our night-time.

We have to consider all this. Particularly recently as the market has been significantly broader in its price movement relevant to our timeframe.

Therefore, going back to a full suite of currency pairings, is that necessarily a good idea?

It comes down to discipline.

If we weren’t stubborn about our trading strategy and objective, it wouldn’t work. James will analyse each of the pairings, but day to day and maybe week to week, the majority of pairings will not present us with a trade opportunity because of some of the reasons already mentioned.

However, we’re never sure at what point that will change. Sure, if trading an hourly timeframe, the change isn’t minutes but probably days.

Nevertheless, we stay on top of the analysis so that everything is in place when the trade entry presents itself—which it always does.

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