How to Choose a Currency Pair: 6 Effective Steps

One of the choices that a trader must make almost every day, or at least every time they tend to place a trade, concerns the currency pair to invest in. Is there an effective method to choose? Actually yes, and it consists of "only" 6 steps. In this article, we list and describe them, in order to provide a complete guide for those who find themselves in difficulty every time they have to choose a currency pair to trade. First, however, a clarification on the subject.

Currency pairs: why it's important to choose them well

The answer, to tell the truth, is quite simple and intuitive: each currency, and therefore each pair, has its own specificities. It is in a relationship of interdependence with economic parameters and market movers, it settles on specific liquidity levels, it is more or less interpretable. Therefore, in a certain sense, the choice has a profound impact on the fate of a trade. Choosing the wrong pair means laying the foundations for a defeat. The discourse softens, and at the same time stiffens, if the trader is highly specialized. It's obvious: if the trader is almost exclusively specialized in one or two pairs, they cannot help but trade on them. Also because abandoning the certain for the uncertain could be dangerous. The question of choice is still useful to everyone, as sooner or later it also happens to hyperspecialized traders to have to move to another asset, perhaps because the reference market is sluggish, moves too laterally or, on the contrary, is upset by a period of intense and incomprehensible volatility. In any case, if you think the undertaking is arduous or at least complicated, know that there is much worse. Stock traders have to choose from a huge amount of assets, currency traders don't have all this embarrassment of choice. Although officially dozens of currencies are available, in the end those that are worth trading are seven or eight.

The 8 steps to choose the currency pair

Below we present the necessary steps to effectively choose the currency pair on which to base your trades.

Study the chart

Obviously, it's the first initiative to take. If possible, early in the morning. This way you can get a general idea of how the day will go. Sure, the old adage that "the day is seen from the morning" has nothing technical or scientific about it, but the psychology of traders and sentiment tend - in case of flat calm - to persevere. So, study how the main currency pairs are behaving, or at least those you feel comfortable with. The issue is less complicated than expected because, despite the great abundance of currencies in the real world, those that are worth trading are just seven or eight. To analyze the behavior of currencies simply by looking at the chart, let's be clear, you should boast some graphical analysis skills. Nothing so complicated, among the many analyses that a trader can practice, graphical analysis is the easiest.

Take a look at the economic calendar and the latest news

After an initial graphic analysis, it is necessary to practice at least a bit of fundamental analysis. The reason is simple: no matter how solid the positions of the individual currencies may be, external news can upset the market at any time. Once you have analyzed the economic calendar and reviewed the day's events, you have to make a choice: currencies affected by the market movers of the day or neutral currencies? The answer depends on two factors: namely the degree of knowledge about that specific market mover and the trading style. It is obvious that a more prudent and measured approach suggests an equally prudent choice, that is towards a currency pair (at that moment) neutral.

Check how they behave individually and associate the strongest with the weakest

Now is the time to study the currencies more closely, and to do so separately. The basic principle is to gather information on individual currencies and only then associate them, until you find the pair that best suits the needs of the moment and your own inclinations. How to do it? The basic idea, at least in the preliminary phase, is to persevere with the chart, so as to evaluate how the individual currencies have moved in the meantime. Ideally, however, use a plurality of tools. The second phase consists in distinguishing the strong currencies and the weak currencies (in reference to that specific session). The third is to pair the strong with the weak. The reason? Simple: in this way you will obtain pairs with a well-defined trend.

Verify with technical analysis

After these maneuvers you should have at least three pairs, each with a fairly solid trend. Obviously, what has been done so far is not enough to assign a precise direction to all these pairs. A final verification is necessary. The only way to do this is to practice a good technical analysis. Depending on market conditions, opt for this or that indicator. If possible, however, do not abound with the tools and above all do not change them depending on the currency pair. Uniformity of judgment is important in this case.

Skim the pairs you selected previously

Once you have verified that all the pairs are actually positioned on fairly solid trends, all you have to do is choose. Select one pair and only one. At this point, however, we enter the field of subjectivity. It depends on your "tastes" or, better to say, on your trading style. Since each currency, even in the presence of a specific trend, boasts its own peculiarities, take them into consideration when choosing. If for example you love to exploit volatility (if you are capable of it) opt for pairs that have within them less liquid currencies, which are those most subject to market turbulence.

Do money and risk management

Finally, once you have chosen the currency pair, all you have to do is place the trade. This last step doesn't exactly have to do with choosing the "pair", but it still deserves to be mentioned. The advice is simple: adopt specific money and risk management measures. That is, program the trade so that even in the worst case scenario, the defeat is well digestible and, at the same time, set stop loss and take profit levels that can put you in a safe place in case the market doesn't prove you right. After all, money management and risk management are the only disciplines that can give trading activity a minimum of protection, and that can reduce the risk that, from a purely financial point of view, permeates the market.