Forex and Faithfully Trading One Pair

I've been asked numerous times, "How do you choose which pair to trade?"

The question is a simple one, but the answer, and the rationale behind it, often eludes traders.

There are many wrong ways to trade forex. Which means there are a lot of ways to lose money. One of the fastest is by over trading. Most unsuccessful traders understand that to mean simply trading too frequently. But there is more. We have frequently talked in this forum about the dangers of leverage that is too high. Using such positions is another form of over trading.

But then there is this: trading several pairs at once. Especially when trading the majors, as they have various tendencies to move in in sync with one another either yielding to or overpowering the USD. So that in trading several pairs at once, often you will will find your trades are all essentially the same, either buying or selling them all against the USD.

Thus if you take trades in the euro, sterling, and swissy, they will all generally trend in the same way. But you have actually increased your leverage by 3x's. That seems great when the trades go your way, but the opposite move, if you've made the wrong call, will put a huge dent in your account. Also, if you are trading pairs that are moving out of sync with each other, then, more often than not, your trades will simply offset one another. Again, no great benefit in that. But if you've made the wrong call, you've doubled your leverage against yourself, and that's going to hurt.

Also important to consider is the effect of news on your pair. It is difficult, if not nearly impossible, to keep up with all the news on multiple pairs. It can be done, but the major effect is sheer confusion.

So after years of trial and error (mostly error in this department) my "infinite wisdom" on the subject is that a trader is better off to specialize in one pair. As you work with it day in and day out, you get a better feel for the currency, and how it acts and reacts. You get a feel for it's news responses, and how fast it moves and for how long. All this is important. But you also get to have a sense of which direction the news is moving. And, apart from the major releases, which secondary ones are likely to make the pair move, how much of a surprise the news has to be percentage wise to generate a move, how big the average move is based on your surprise percentage, and how long it takes for the move to play out.

Frankly, it is more than a little difficult to keep all of that straight for multiple pairs, even though you could print it out on a spread sheet. But additionally, if you are trading multiple pairs at once, then you actually have to watch them in your portfolio in real time.

I'll be the first to admit, I am no genius. But that's OK. Whatever impediment that is to becoming a good trader, I've gotten beyond it. But I've also learned my limitations. And I tend to think that my limitations are not all that different from the average trader. But trying to trade multiple pairs has virtually always proven a serious mistake, for the reasons I've mentioned above. But if you don't think they apply to you, more power to you. But you better experiment with them very carefully. Don't bother doing it with demo accounts. The truth is, even a marginally bad trader can make money with a demo.

Why?

Because nothing is at stake. Any trader worth his salt knows that the heart and mind work far differently when real money is on the line. Period.

So if you want to experiment with multiple pairs, do it in a real account, with the smallest leverage possible. Then make your evaluation over several months...6 at a minimum.

But now we have to get to the first question. I have tried to show why I find it prudent to only trade one pair at a time. I hope that will save you a boatload of money. But how do I find the right pair? That is a little more simple. In general, I want to find the pair that has decent volatility to make the moves I need.

But when I say "decent" volatility, I mean it in two ways. First it has to have enough volatility. Trading a boring pair is not all that much fun, or profitable. Second, it should not have too much volatility. Trading a gut wrenching roller coaster gets old in a hurry also.

Next, I want to find a compelling story. What is making this pair move, and, how long can I expect it to last? The Euro has been that story for over a year. Is it playing out now? Is the excitement all gone? I doubt it. We've taken a bit of a breather, but this looks like it has the ability to continue moving. The volatility is neither too high nor too low. And of all the pairs to trade, it has the narrowest spread, so it is least expensive. Plus, I tend to think that what traders are doing to the euro now, they will be doing to the US dollar next. So we can use this as the training ground for "cutting our teeth" for when the USD goes on fire sale.

In my first successful days of trading, I was actually a sterling specialist. But when the recent credit crunch came, it became too volatile for me. So it was time to switch to the euro. Up until then, the euro was just a boring currency as far as I was concerned.

The day will come when traders will no longer be as fond of the euro as they are now. Volatility will die down, opportunities will become more scarce. Then we will look abroad for another pair to trade!

I hope that this was helpful!

Happy Trading!

Bill
www.thefxtradingmasters.com