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Comparing Currency Pairs

compare-currenciesWhy are you trading that? What was the criteria you used to select the currency pair or pairs you trade? Most traders start out trading the most popular pairs such as the EUR/USD, USD/JPY and GBP/USD. Often their decision is based upon where they live as well as knowledge of underlying economies connected with currency pairs. As traders gain experience they will trade a wider variety of pairs-scanning charts for trading opportunities. However, after a few years of trading, most retail traders will settle on a few pairs or even a single pair to trade.


Each pair-categorized as majors, crosses, and exotics-have their own characteristics, and historical data suggests that pairs often behave according to established patterns and ranges over long periods of time. Moreover, some pairs are more liquid than others which can translate into greater volatility, bigger price spikes, and wider daily ranges. It’s good to know how each pair is likely to behave, though nothing is “set in stone.” Traders whom are risk averse, would certainly want to shy away from those currency pairs that have an erratic history or are notoriously volatile, even during off peak trading hours. Here are a few things traders may want to consider:

Each currency is unique.  The EUR/USD for example, has a wider average daily trading range than the GBP/USD and range traders may find the latter easier to trade. On the other hand, the USD/NOK is a bit wider, and can be tough for traders with smaller account balances, even when they are trading micro accounts. Generally, the majors-EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, USD/CHF, USD/CAD- have the most volume and the most information available.  They all are USD pairs and related to each other in the way they trade. A movement in one pair will likely be reflected in movement in the other pairs.  XAU/USD (gold) and ZAG/USD (silver) are also considered to be “majors,” but they have different characteristics related to their commodity status. The AUD, CAD and NZD are considered “commodity currencies” due to the predominant role that raw material exports-from minerals to oil-play in their economies. Shifts in supply and demand have a much greater effect on the price activity of these currencies and they can be extremely sensitive to very subtle changes in the global economy. Any fluctuation in the Chinese economy for example, and the AUD feels it. Crosses or non USD trading pairs, and exotics (currencies from the emerging market economies) are less liquid than the majors, and the risk factor for trades is increased. However, many experienced traders find the rewards compelling enough to overlook the far higher spreads that accompany these trades. On major news days or breakouts in the majors, the exotics can experience huge movements that dwarf the majors, making for astonishing profits...or losses.

Matching currencies to trader psychology.  Despite a global economy, currencies can trade according to national or collective psychology. U.S. traders for example, often exhibit a bias towards the USD which can translate into more longs on many major currency pairs, even with scant news. The same can be said of the EUR as well as the GBP. Traders will often short the currency they do not have a national or personal affiliation with. While traders are best when they remain as objective as possible, the natural tendency of humans means that this is rare and traders will fall into patterns reflecting a sort of “group think” or herd mentality.

Some pairs are better than others. Matched to specific strategies, some pairs just perform better for a particular trader than others. Many traders find the EUR/USD and other majors to be more “predictable,” as they are able to comprehend patterns more easily. Traders certainly want to choose the pairs that reduce risk and accentuate positive risk and reward ratios. To do this, many traders will back test historical data of multiple pairs, look at average daily trading ranges, and test trades in demo accounts. Swing traders in particular..and those that find range trading more suited to their trading style...will usually look for pairs that have long periods of movement within key support and resistance levels. Breakout traders and scalpers will want something completely different and will be more attracted to pairs that have great ranges or a history of large spikes on news events. Though it is very difficult to time entries, traders with these methods, will seek those periods where market activity has shown greater movement. For example, the opening and closing of the Asian trading session for currencies paired with JPY and AUD, the London trading session for XAU, and the overlapping period of the London and New York trading sessions for the EUR. 

Viewing the forest, AND the trees. The major currency pairs can crowd out the light on other pairs. Simply, the amount of information available for the majors overwhelms other news in the market, and for many traders-even those with access to Bloomberg terminals-it’s just easier to “go with the flow” and focus on pairs where there is sufficient info circulating. The bolder traders will dig a bit deeper, and may trade the Russian Ruble (RUB) or the Mexican Peso (MXN) or the South African Rand (ZAR).  Traders living in these countries, or in other developing countries such as India  (INR) or Turkey (TRY), can enjoy an advantage as they are closer to the sources of information, and don’t require translation of news. However, traders with enough analytical skills will also be able to compete. While information may be more obscured and harder to come by, there are fewer traders whom concentrate on these, and this by itself can make learning and trading these currencies, attractive. Traders whom gain real knowledge of the patterns and traits of these currencies, could develop a very clear trading edge in comparison with others. Money and risk management is more challenging with these currencies, but the potential rewards are enormous, even with the higher costs of trading them. 

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