February is a great time to evaluate your trading strategy and consider the currency pairs you trade. Knowing what to do is not enough to succeed in the market. Your choice of currency pairs can significantly impact your success.
The Forex market is one of the world’s largest financial market, with over $6.6 trillion traded daily. One must possess the wisdom and understanding to put all the pieces together and create a workable strategy. This article will share tips on selecting the right currency pairs to make February a profitable month.
Types of currency pairs.
Let’s start by clarifying what forex currency pairs are. In forex trading, a currency pair is a combination of two currencies. When trading, one currency is bought while the other is sold. The exchange rate shows how much of the second currency is required to buy one unit of the first currency. The first currency listed in the pair is the base currency, and it is the currency being traded. The second currency is the quote currency and represents the value of the base currency in terms of the quote currency. For example, in the USD/JPY pair, USD is the base currency, and JPY is the quote currency.
It is also important to know the different types of currency pairs available in forex trading and these include:
- Major pairs: Major currency pairs are the most widely recognized and heavily traded currencies in the world, always featuring the US Dollar (USD). These pairs are considered major because they typically represent strong and stable economies. Traders prefer major pairs because they offer high liquidity, which means they can be traded easily and with minimal price fluctuations. Major pairs also offer lower spreads, which makes trading them cost-effective. Examples of major pairs include EUR/USD, USD/JPY, and GBP/USD.
- Minor pairs: Minor currency pairs or cross-currency pairs exclude the US Dollar and consist of two major currencies from different countries. Even though their trading volumes may be lower and their spreads slightly wider than major pairs, they are still actively traded in the forex market. Traders use them to diversify their portfolios and minimize their dependence on the US Dollar. Examples of minor pairs are AUD/JPY, EUR/NZD, CAD/JPY, AUD/NZD, etc.
- Exotic pairs: Exotic currency pairs combine major currencies with those of smaller economies. They are not commonly traded and have wider spreads, lower liquidity, and higher volatility. Traders interested in exotic pairs should have a higher risk tolerance and an understanding of political and economic factors. Examples include USD/NOK, USD/ZAR, GBP/ZAR, EUR/SGD, etc.
Choosing the right currency pair
Having gone through the concept of forex currency pairs, let’s begin to consider the factors one has to consider in choosing the right currency pair for trading to make your February an exciting trading month.
- Set clear trading goals and objectives for the month
Thomas Edison once said, “Good fortune is what happens when opportunity meets with planning”. This statement holds for traders who look forward to making profits in the forex market. Planning your trades is crucial for trading success. Choose the right currency pair based on your trading strategy and objectives. Highly liquid major pairs like EUR/USD are better suited for short-term gains through day trading, while less volatile pairs like major or minor pairs such as EUR/AUD, AUD/NZD, etc; offer stability for long-term investors. Each pair has its own risk and reward profile, so choose wisely and make informed decisions to achieve your goals.
- Understand the economic calendar concerning each currency pair
The choice of currency pairs in trading is largely influenced by the market conditions and volatility levels at any given time. Therefore, it is crucial to stay informed about economic events and news releases when selecting forex pairs. During periods of high market volatility, which can arise due to economic events, geopolitical tensions, or significant news releases, some currency pairs tend to experience larger price swings. Traders who seek short-term gain opportunities through volatility may prefer to trade active currency pairs during these times. In contrast, during calmer market conditions, traders who prefer stability may opt to trade less volatile major currency pairs.
- Trade within your Risk tolerance
Trading in the Forex market can be unpredictable and risky. Traders must pick currency pairs that match their risk tolerance. Major currency pairs are generally considered less risky because of their stability and liquidity, making them a good choice for traders who prefer low-risk options. However, exotic currency pairs are often linked to higher risk and volatility. If a trader has a higher risk tolerance and is willing to accept greater price fluctuations, they may consider trading exotic currency pairs or other higher-risk options.