October 21, 2007

Best Currencies To Trade When Trading Forex?

When you first become interested in forex trading it can be difficult deciding which currency pairs you should be trading. Is it best to keep your eye on all of them or focus on just a few pairs?

Well there isn't really a right and wrong answer. A major factor is your own particular trading style. For example, if you have a very solid trading system based on technical analysis criteria, then you could watch all the currency pairs and wait for the right set-up to occur in any one of them in order to enter a trade.

Most pairs conform very well to technical analysis so this can be a very profitable method if you have a solid reliable trading system in place.

Another approach used by myself, and I would guess the majority of traders, is to only focus on the major currency pairs – GBP/USD, EUR/USD, USD/JPY and USD/CHF.

These are the most actively traded currencies so it makes sense to only trade these as they conform extremely well to technical analysis. This is because charts are essentially displaying human behaviour and with so many people across the world all looking at the same charts, you can start to understand where people are likely to enter and exit positions.

The major advantage of this method is that these pairs generally have the tightest spreads which is important because over the longer term these wider spreads can really make a dent in your profits.

Another benefit of only watching these pairs is that by concentrating on a fewer number of pairs you can learn the personality of each one and learn how they move, making it easier to identify trends and take a position.

Finally, one other factor is your location and the time of the day when you are available to trade. For example, if you can trade the forex markets between 7.00 GMT and 17.00 GMT, then the GBP/USD or EUR/USD would be a good volatile pair to trade as this is when the London and European markets are open and at their most busiest.

So to sum up, there are not really any best currencies to trade, all can be very profitable. However you should take the tightness of the spreads into consideration and the behaviour of each currency pair, which is why I generally recommend trading just one or more of the four major currency pairs - GBP/USD, EUR/USD, USD/JPY and USD/CHF.

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