How To Choose The Right Currency Pairs and Time Frames
Over their trading routine, many forex traders find trouble choosing their preferred currencies for the day and also get confused selecting the time frames to watch. These two choices are however very important if an investor is to succeed in their trading career. Here are some simple ideas that can help an upcoming trader to know how and when to select certain currencies and trade them in a specific time frame.
Watch how the currencies correlate with each other
The correlation between currencies may affect how well the positions adapt to your risk appetite. Some pairs follow each others trends while some do the opposite of what a base currency is doing at a given time. When two pairs are closely correlated (whether positive or negative), there is a high chance that the overall effect on profit or loss will be the same. Opening two separate trades on the closely correlated currency pairs would be the same as duplicating an existing trade. The problem with such a move is that the trader takes on more risk without there being a genuine diversification advantage.
Could you be over-reliant on one currency?
Many Forex traders do not know it yet, but their trade portfolio may be packed with positions that have a connection to one currency. For example, one may trade the dollar against most other currencies, ending up with a portfolio that consists of the EURUSD, USDJPY, GBPUSD, USDCHF and AUDUSD all at the same time. One painful reality about such a portfolio is that if someone was long on the Dollar on most of those positions, massive losses will be incurred once the USD begins a bearish slide. Spread the risks and make sure that the positions reflect a wide variety of currencies.
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Pair stronger currencies with weaker currencies
When selecting the pairs, consider pairing a strong currency with a weak currency. In such setups, it is easier to identify a strengthening or weakening currency in good time. As an example, the USDCHF will move in a strong uptrend if the dollar is strengthening against the weaker CHF. The same trick also applies when there is a currency which has a higher volatility and is paired versus a currency that is showing consolidation. For that reason, it is common to find the USDCHF gapping higher than the USDCAD or vice versa, even though both have the USD as the base currency. This approach helps traders base any analysis on a trending currency.
The other decision that mixes up new traders is that to do with selecting the time frames to trade. It gets even more confusing when a 5-minute chart shows decline while the 4 hour charts show a rising trend. Always note that the direction of a higher time frame chart such as the 4 hour chart will overrule the direction implied by the lower time frame charts such as the 30 minute chart. The lower time frame charts tend to find activity at the support and resistance levels set in higher time-frame charts. A “safe” way to trade between charts is to get the overall trend from a chart such as the H4 and then use smaller time-frame charts like the M15 to pinpoint the entries. In this kind of trading, the it also becomes easy to identify potential trend changes as they develop making success rates high.
With the right techniques of selecting time frames and the currency pairs to trade, investors increase their chances of not only making, but keeping their profits during their routine.