Focus on One Currency Pair (guest article)
When it comes to forex trading, specialization and not diversification is the key to success. While it may seem that by focusing on a single pair you are putting all your eggs in one basket, in fact, you are actually increasing your chances of success. Successfully trading currencies requires a lot of analysis of the market, and it is easier to do that by completely familiarizing yourself with a single pair so that you can more readily identify trading opportunities.
What are the benefits of focusing on a single pair? You can more readily study the economies those currencies come from so that you can better understand the fundamental factors that affect their values. It is also important to understand that just because a currency pair shares a currency with another pair does not mean that they will behave in the same way. For example, the USD/EUR will behave differently from the USD/JPY even though they both include the US dollar. Other characteristics of currency pairs that you need to keep in mind is that they behave differently at different times of the trading day and their values move at different speeds.
In addition, by studying a single pair, you will be able to observe how its values change over time. This can give you greater insight into how it will react in the present under particular political and economic developments. This may allow you to identify trading opportunities that other traders with less knowledge and experience may not see.
Of course, there are traders who would argue the opposite position, that by focusing on a single pair they are actually limiting their profit opportunities. But if you are just starting out as a forex trader and still learning the basics, you are better off focusing on a single pair rather than trying to study several pairs at once.
How do you choose which currency pair to specialize in when you’re starting out? Here are some suggestions.
Choose a major pair that is traded a lot. These include those that have the US dollar as one of the pairs (USD/JPY, EUR/USD, USD/CHF). The main advantage of trading one of these pairs is that they enjoy a lot of liquidity and have a lot of volatility. This means that they generate strong trading signals that you can easily detect to open a trade.
Choose a pair that includes your home country’s currency. Since you will essentially have to study the economies of two countries when you focus on a pair, you can make your job easier since you already understand how the economy of your own country works. You also have a greater understanding of the factors that affect the values of your own currency.