Although forex trading continues to be popular among retail investors, most of them do not take into account several important principles, which leads to some painful mistakes and loss of capital. We’ve been told by online educators how important it is to be diversified when trading forex, but a proper methodology on how to build a diversified forex portfolio can hardly be found.
Choosing a forex pair for trading should be done based on a series of factors that we’ll discuss today and hopefully, you will take them into account from now on.
Your own psychology
How many times did it happen to read an online material about how much profit you could make by trading a particular instrument? Most of us had gone through that and it did not end well. Huge profits in a short period of time = huge risks or huge volatility.
Volatility is one of the most important psychological factors for retail traders since it dampens their objective thinking and how they make trading decisions. It is crucial to notice how you react to high volatility. If you are not able to follow your trading plan to the tea even when the market gets wild, the instruments you trade should be chosen according to that.
Until you learn how to manage volatility, follow on the most popular and liquid currency pairs. Daily or intra-day swings are much lower and you will manage to execute your system even when activity picks up. As you learn, you could gradually move to exotic pairs, which tend to move more aggressively. Luckily, with brokers like easyMarkets or forex.com, as well as with the other popular ones, you have a lot of forex pairs to choose from.
Geographical location and your schedule
If you live in Europe or in the US, forex pairs containing the Euro or the US dollar are some of the most suitable. In Asia, Yen, Aussie, or Kiwi pairs would be good. You want to be able to catch activity in the market during the day, so you won’t need to stay awake during the night to follow major economic events.
Your daily schedule should play an important role in determining which forex pairs you choose. Are you a full-time employee and online trade in the afternoon? How many hours can you stay in front of the charts per day? You should do a little bit of research and see what forex pairs are active when you are able to trade and stick to them.