The European Union has published new regulations applying to retail Forex, CFD, and the few remaining binary options brokerages in its territory. If you have an account with one such brokerage, the regulations will affect you when they come into force during the late spring and summer. This article will outline how the new regulations will impact your bottom line.
Details of the New ESMA Regulations
In March 2018, the European Securities and Markets Authority (ESMA), the financial regulator and supervisor of the European Union, announced new regulations concerning the provision of contracts for differences (CFDs) and binary options to retail investors. It is unclear exactly when the regulations will come into force, but some time in May or June 2018 looks to be the most likely date, and Forex and CFD brokerages located within the European Union (including the United Kingdom, for the time being) will be forced to comply. The regulations will need to be renewed by ESMA every three months to remain in force over the long term.
The regulation concerning binary options is very simple: they may not be sold. In simple terms, this is the end of binary options as a product sold from within the European Union.
The regulations concerning CFDs are more complex but still relatively straightforward. Firstly, there is some confusion as to what exactly is a CFD, with many traders thinking that spot Forex is not considered a CFD and will therefore be exempt from the new regulations. They are wrong: spot Forex is technically defined as a CFD. In fact, every asset you see available for trading at Forex / CFD brokers will most likely be subject to the new regulations.
The new regulations will implement the following changes for retail client accounts (more on who is a retail client; later).
-
The maximum leverage which can be offered will be 30 to 1. That will apply to major currency pairs such as EUR/USD, GBP/USD, USD/JPY, etc.
-
Other currency pairs, major equity indices, and gold will be subject to a maximum leverage of 20 to 1.
-
Individual equities cannot be offered with leverage greater than 5 to 1.
-
Cryptocurrencies are subject to a maximum leverage of 2 to 1.
-
Brokers will be required to provide negative balance protection, meaning it will be impossible to lose more money than you deposit.
-
Brokers will be required to close a clients open positions when the account equity reaches 50% of the required minimum margin by all open positions. This ;margin call; provision can be tricky to understand, so will be explained in more detail later.
-
Bonuses or any other form of trading incentives may not be offered.
-
Brokers will be required to display a standardized risk warning which will include the percentage of their clients who lose money over a defined period.
Understanding the ;Margin Call; Regulation
The best way to understand the 50% margin call provision is to use an example. Imagine a client opens an account with a Forex broker, depositing ;100 in total. The client opens a short trade in EUR/USD, by going short one mini-lot (one tenth of a full lot). One full lot of EUR/USD is worth ;10,000, meaning one mini-lot is worth ;1,000. To find out the minimum margin required to support that trade, we divide the size of the trade (;1,000) by 30, which comes to ;33.33. This is the minimum required margin to maintain the trade. Half of that amount is ;16.67. Now assume the trade goes against the client, with the price of EUR/USD rising above the entry price. As soon as the price rises far enough to produce a floating loss of ;83.33 (;100 - ;16.67), the broker must close the trade out, even if the trade has no stop loss or has not yet reached the stop loss. In theory, this means that a client;s account can never reach zero. Examples involving multiple open trades will be more complex, but will operate according to the same principles.
What Will This Mean for Traders?
The regulations will only apply to ;retail clients;, so you might try to apply to be classed as a professional trader. To get a broker to classify you as anything other than a retail client, you will have to show you have financial qualifications, a large amount of liquid assets, plenty of experience trading, and usually that you also trade frequently. Most traders will be unable to qualify, although it is worth noting that one London-based brokerage, IG Group, has stated that their proportion of clients now classified as recently increased from 5% to 15% of their total customers.
The major impact these regulations will have on traders is simple ndash; the maximum trade size they can possibly make at brokers regulated in the European Union will shrink. Many will say that the maximum leverage limits still offer far more than any trader could need, and I agree. I am wary of leverage and I hate to see anyone using leverage greater than 3 to 1 for Forex under any conditions, or any leverage at all for stocks and cryptocurrencies. Commodities can also fluctuate wildly in value. Too many people forget that the biggest danger in leverage is not overly large position sizing, it is that a ldquo;black swan rdquo; event such as the CHF flash crash of 2015 could happen and wipe out your account through huge price slippage. However, there is another factor that is widely forgotten: why assume that a trader rsquo;s account at one Forex broker is all the money they have in the world? For example, a trader might have $10,000 in the bank. If they deposit $1,000 at a broker offering maximum leverage of 300 to 1, they can trade up to $300,000. At a leverage limit of 30 to 1, that trader will have to deposit their entire $10,000 fund to trade at the same size. In a real sense, that trader might now have to take on more risk to operate in the same way, because if the broker goes bust, while beforehand they might lose $1,000 now they could lose $10,000! Even without negative balance protection, that broker would still have to come after them to try to get an extra $9,000 which they theoretically risk. Yet we saw after the CHF crash that brokers don rsquo;t come after every single client whose losses exceeded their deposit, due to legal costs and reputational issues. This shows that although the stated purpose of the regulation is to protect traders from excessive losses, the story is not as simple as you may think.
Beyond having to deposit more margin, and automatic margin calls, the other major change for traders will be that they will enjoy negative balance protection. This is a positive development which hopefully will make brokerages focus more heavily on the risks they are taking with their business model in the market. At the same time, a possible side effect of the new regulation is the potential increase in average deposits, leading to brokerages being more stable and better capitalized with client funds. Two final notes: brokerages will have to report on their websites the percentages of clients who are losing and making money, although the period over which the statistics must refer to is currently not clear. This will help to shed light on the debate over what percentage of retail traders are profitable, although some brokerages have already released what they claim to be accurate statistics showing that clients with larger account sizes tend to perform better as traders. Additionally, bonuses and promotions will be banned. I welcome this, as not only do they trivialize the serious business of trading, they are almost always a trick offering the illusion of free money whilst preventing traders from withdrawing any profits until a large number of trades are made (read the fine print the next time you squo;).
What If Yoursquo;re Not Happy Remaining in the EU?
Traders with accounts at affected brokers who cannot obtain professional status classification and feel they really need higher leverage than the ESMA limits outlined above might look for a solution by opening accounts with brokers outside the European Union. The most obvious destination would be Australia or New Zealand, where it will still be possible to find reasonably well-regulated Forex brokerages offering leverage in the range of 400 to 1. A recent development that is not talked about much is the growing difficulty of transferring funds to and from Forex brokerages in less tightly regulated jurisdictions. You might decide to open an account with a brokerage in Vanuatu, but you may find that a bank within the European Union might just refuse to send your money there for a deposit. This means that going far offshore, depending upon where you live, may not be a feasible option. In any case, the new regule impossible to live with, and overall there is a compelling case that they are a net benefit to any trader, so why migrate?
Which Currency Pairs Should I Trade? | Trading Forex
One of the biggest mistakes made by many Forex traders is not understanding that deciding correctly what to trade, and in which direction, is 90% of the battle to turn a profit. Unfortunately, too many traders focus on trying to perfect entry methods, not realizing that if you correctly pick what is going to up today, for example, then the exact entry method you use is not going to make a major difference to your trading results. You can become an expert in picking entries on the 5-minute chart, but if you don’t pick what to trade using a broader, higher timeframe perspective, it will be of little use to you. Why do traders make this mistake, and how can they decide which currency pair or pairs to trade each day in a more intelligent way?
Why Traders Don’t Consider Pair Selection Carefully
Most traders are eager to start making lots of money. The way to make lots of money quickly, so they are told, is to trade using smaller timeframes – this is at least theoretically true. Traders notice that some currency pairs have lower spreads (such as EUR/USD) and think they should pick such low-spread pairs to trade to save costs. Another common reasoning is that it makes sense to trade those currencies which are most active during the trader’s preferred hours of operation. A further argument says that each currency pair has its own “personality” and you should get a lot of experience trading a few pairs so you can get to know their personalities well, and in this way, trade them more successfully.
These considerations are both rational and truthful, at least to some extent. The problem is, that they are very far from being the most important consideration that should influence which currency pairs you trade. I learned this myself the hard way some years ago when I decided that I would day trade, the EUR/USD and GBP/USD currency pairs full time. Over several months, these two pairs barely moved, while USD/JPY took off like a rocket and provided easy money to anyone trading it. Sure, I knew the personalities of EUR/USD and GBP/USD very well, had a great strategy which had worked extremely well on these pairs for years, and their hours of greatest activity fitted the time zone of my geographical location precisely. Despite all this, my linear thinking caused me to miss out on the only real trading opportunities of 2012, which came in the JPY pairs and crosses.
The #1 Factor to Use in Deciding Which Pair(s) to Trade
So how should you decide which currency pair or pairs to trade? I’ll use an analogy to the world of gambling to simplify the issue: Let’s say you go into a casino to play a game where you need other players to risk money on the table to give you a chance to make profit, i.e. your winnings will come from their losses. This is a good comparison to the Forex market, which works the same way. So, which table would you go to? The busiest one, with the most players and most money on the table, or a quiet one in the corner with just a couple of players there? Obviously, it would make sense to choose the busiest table. So why should Forex trading be any different? You want to be trading the “busiest” currencies at any given time, you want to be where the action is. Are there any ways to determine that? Well, you could try reading the Forex news to spot the biggest things that are happening in the market now. There’s a place for that, but there are easier ways that can tell you where to begin to focus your search. Although Forex is “over the counter”, there are reliable statistics which tell us which currencies are traded the most, i.e. which currencies are exchanged in the largest volumes. The takeaway headline is that today, about 70% of all Forex trading is between the U.S. Dollar, the Euro, and the Japanese Yen only. The British Pound and Australian Dollar account for another 10%. The U.S. Dollar is by far the most dominant of all these currencies, so it makes sense to focus on each of the other currencies against the U.S. Dollar. You don’t need to open your trading platform and worry about 80 pairs and crosses or wonder whether the Canadian Dollar / Swiss Franc cross is what you should be trading today. It almost certainly isn’t, and if you ever hear anyone telling you about a support or resistance level in a currency cross like that, please ignore them – nobody is watching this cross or its levels!
Narrowing Down the Field
Now you know that it is only worth watching a few currency pairs, you will find it much easier to know which one or ones to be trading any day. The method to use to answer this question in detail, is which of these currency pairs are likely to have the most volatility? You need volatility, because if the price does not move, how are you going to make any money? You need to buy and sell at the widest price differentials you can possibly find, to make the greatest possible profit. There are a few ways to forecast where market volatility is likely to be, and if you apply the methods I outline below, you should get some good answers.
The first thing to know is that statistically, in markets, volatility “clusters”. Suppose the average daily range of a currency pair is a movement of 1% of its value, taken over several days. Suddenly, one day it moves by 3% of its value. Volatility clustering research conducted by data scientists such as Benoit Mandelbrot tell us that this pair is more likely to move by something more than 1% tomorrow, quite possibly actually by an amount closer to 3%. So, when you see a currency pair move by more than its average volatility, that high volatility is more likely to continue than reverse over the short term. Another approach could be to calculate the average true range (ATR) of the past 5 or 10 days for EUR/USD, GBP/USD, and USD/JPY, and calculate these values as percentages of each pair’s price from the start of the period. Whichever has the largest value, is probably the pair it makes sense to focus on tomorrow.
Another crucial factor is trend, or momentum (they are essentially the same thing). The major currencies such as the U.S. Dollar, Euro and Japanese Yen, have, in recent years, shown a greater probability to move in the direction of their long-term trends. One good rule of thumb in trading major currency pairs is asking yourself, is the price higher or lower than it was 3 and 6 months ago, and trading mostly or entirely in the same direction as any long-term movement, if it exists.
If you are trading only during Asian business hours, you will probably find that your best opportunities will involve Asian currencies such as the Japanese Yen and Australian Dollar. I urge you to consider whether you can develop a method to trade longer time horizons, as otherwise you could be missing other opportunities while you are asleep, the same way I missed out on USD/JPY opportunities in 2012. If I had the wisdom to trade daily charts back then, I could have profited from that big movement in the Yen very easily, even at night while I was asleep, with traders in Tokyo doing the heavy lifting for me!
Finally, if you watch an economic calendar to see when the major central bank or most important economic data releases are scheduled for the major currencies, you can see that if you are in a trade before those releases, those releases might provide you with the volatility you need to turn your trade into a big winner, or at least show you where some volatility is likely to appear.
So, narrow your focus to the major pairs, and trade the currencies showing the highest volatility, and watch where the bigger long-term trends are. This should give you the best chance of success in Forex trading.
Source
Which Currency Pairs Should I Trade? | Trading Forex
One of the biggest mistakes made by many Forex traders is not understanding that deciding correctly what to trade, and in which direction, is 90% of the battle to turn a profit. Unfortunately, too many traders focus on trying to perfect entry methods, not realizing that if you correctly pick what is going to up today, for example, then the exact entry method you use is not going to make a major difference to your trading results. You can become an expert in picking entries on the 5-minute chart, but if you don’t pick what to trade using a broader, higher timeframe perspective, it will be of little use to you. Why do traders make this mistake, and how can they decide which currency pair or pairs to trade each day in a more intelligent way?
Why Traders Don’t Consider Pair Selection Carefully
Most traders are eager to start making lots of money. The way to make lots of money quickly, so they are told, is to trade using smaller timeframes – this is at least theoretically true. Traders notice that some currency pairs have lower spreads (such as EUR/USD) and think they should pick such low-spread pairs to trade to save costs. Another common reasoning is that it makes sense to trade those currencies which are most active during the trader’s preferred hours of operation. A further argument says that each currency pair has its own “personality” and you should get a lot of experience trading a few pairs so you can get to know their personalities well, and in this way, trade them more successfully.
These considerations are both rational and truthful, at least to some extent. The problem is, that they are very far from being the most important consideration that should influence which currency pairs you trade. I learned this myself the hard way some years ago when I decided that I would day trade, the EUR/USD and GBP/USD currency pairs full time. Over several months, these two pairs barely moved, while USD/JPY took off like a rocket and provided easy money to anyone trading it. Sure, I knew the personalities of EUR/USD and GBP/USD very well, had a great strategy which had worked extremely well on these pairs for years, and their hours of greatest activity fitted the time zone of my geographical location precisely. Despite all this, my linear thinking caused me to miss out on the only real trading opportunities of 2012, which came in the JPY pairs and crosses.
The #1 Factor to Use in Deciding Which Pair(s) to Trade
So how should you decide which currency pair or pairs to trade? I’ll use an analogy to the world of gambling to simplify the issue: Let’s say you go into a casino to play a game where you need other players to risk money on the table to give you a chance to make profit, i.e. your winnings will come from their losses. This is a good comparison to the Forex market, which works the same way. So, which table would you go to? The busiest one, with the most players and most money on the table, or a quiet one in the corner with just a couple of players there? Obviously, it would make sense to choose the busiest table. So why should Forex trading be any different? You want to be trading the “busiest” currencies at any given time, you want to be where the action is. Are there any ways to determine that? Well, you could try reading the Forex news to spot the biggest things that are happening in the market now. There’s a place for that, but there are easier ways that can tell you where to begin to focus your search. Although Forex is “over the counter”, there are reliable statistics which tell us which currencies are traded the most, i.e. which currencies are exchanged in the largest volumes. The takeaway headline is that today, about 70% of all Forex trading is between the U.S. Dollar, the Euro, and the Japanese Yen only. The British Pound and Australian Dollar account for another 10%. The U.S. Dollar is by far the most dominant of all these currencies, so it makes sense to focus on each of the other currencies against the U.S. Dollar. You don’t need to open your trading platform and worry about 80 pairs and crosses or wonder whether the Canadian Dollar / Swiss Franc cross is what you should be trading today. It almost certainly isn’t, and if you ever hear anyone telling you about a support or resistance level in a currency cross like that, please ignore them – nobody is watching this cross or its levels!
Narrowing Down the Field
Now you know that it is only worth watching a few currency pairs, you will find it much easier to know which one or ones to be trading any day. The method to use to answer this question in detail, is which of these currency pairs are likely to have the most volatility? You need volatility, because if the price does not move, how are you going to make any money? You need to buy and sell at the widest price differentials you can possibly find, to make the greatest possible profit. There are a few ways to forecast where market volatility is likely to be, and if you apply the methods I outline below, you should get some good answers.
The first thing to know is that statistically, in markets, volatility “clusters”. Suppose the average daily range of a currency pair is a movement of 1% of its value, taken over several days. Suddenly, one day it moves by 3% of its value. Volatility clustering research conducted by data scientists such as Benoit Mandelbrot tell us that this pair is more likely to move by something more than 1% tomorrow, quite possibly actually by an amount closer to 3%. So, when you see a currency pair move by more than its average volatility, that high volatility is more likely to continue than reverse over the short term. Another approach could be to calculate the average true range (ATR) of the past 5 or 10 days for EUR/USD, GBP/USD, and USD/JPY, and calculate these values as percentages of each pair’s price from the start of the period. Whichever has the largest value, is probably the pair it makes sense to focus on tomorrow.
Another crucial factor is trend, or momentum (they are essentially the same thing). The major currencies such as the U.S. Dollar, Euro and Japanese Yen, have, in recent years, shown a greater probability to move in the direction of their long-term trends. One good rule of thumb in trading major currency pairs is asking yourself, is the price higher or lower than it was 3 and 6 months ago, and trading mostly or entirely in the same direction as any long-term movement, if it exists.
If you are trading only during Asian business hours, you will probably find that your best opportunities will involve Asian currencies such as the Japanese Yen and Australian Dollar. I urge you to consider whether you can develop a method to trade longer time horizons, as otherwise you could be missing other opportunities while you are asleep, the same way I missed out on USD/JPY opportunities in 2012. If I had the wisdom to trade daily charts back then, I could have profited from that big movement in the Yen very easily, even at night while I was asleep, with traders in Tokyo doing the heavy lifting for me!
Finally, if you watch an economic calendar to see when the major central bank or most important economic data releases are scheduled for the major currencies, you can see that if you are in a trade before those releases, those releases might provide you with the volatility you need to turn your trade into a big winner, or at least show you where some volatility is likely to appear.
So, narrow your focus to the major pairs, and trade the currencies showing the highest volatility, and watch where the bigger long-term trends are. This should give you the best chance of success in Forex trading.
Source
Which Currency Pairs Should I Trade? | Trading Forex
One of the biggest mistakes made by many Forex traders is not understanding that deciding correctly what to trade, and in which direction, is 90% of the battle to turn a profit. Unfortunately, too many traders focus on trying to perfect entry methods, not realizing that if you correctly pick what is going to up today, for example, then the exact entry method you use is not going to make a major difference to your trading results. You can become an expert in picking entries on the 5-minute chart, but if you don’t pick what to trade using a broader, higher timeframe perspective, it will be of little use to you. Why do traders make this mistake, and how can they decide which currency pair or pairs to trade each day in a more intelligent way?
Why Traders Don’t Consider Pair Selection Carefully
Most traders are eager to start making lots of money. The way to make lots of money quickly, so they are told, is to trade using smaller timeframes – this is at least theoretically true. Traders notice that some currency pairs have lower spreads (such as EUR/USD) and think they should pick such low-spread pairs to trade to save costs. Another common reasoning is that it makes sense to trade those currencies which are most active during the trader’s preferred hours of operation. A further argument says that each currency pair has its own “personality” and you should get a lot of experience trading a few pairs so you can get to know their personalities well, and in this way, trade them more successfully.
These considerations are both rational and truthful, at least to some extent. The problem is, that they are very far from being the most important consideration that should influence which currency pairs you trade. I learned this myself the hard way some years ago when I decided that I would day trade, the EUR/USD and GBP/USD currency pairs full time. Over several months, these two pairs barely moved, while USD/JPY took off like a rocket and provided easy money to anyone trading it. Sure, I knew the personalities of EUR/USD and GBP/USD very well, had a great strategy which had worked extremely well on these pairs for years, and their hours of greatest activity fitted the time zone of my geographical location precisely. Despite all this, my linear thinking caused me to miss out on the only real trading opportunities of 2012, which came in the JPY pairs and crosses.
The #1 Factor to Use in Deciding Which Pair(s) to Trade
So how should you decide which currency pair or pairs to trade? I’ll use an analogy to the world of gambling to simplify the issue: Let’s say you go into a casino to play a game where you need other players to risk money on the table to give you a chance to make profit, i.e. your winnings will come from their losses. This is a good comparison to the Forex market, which works the same way. So, which table would you go to? The busiest one, with the most players and most money on the table, or a quiet one in the corner with just a couple of players there? Obviously, it would make sense to choose the busiest table. So why should Forex trading be any different? You want to be trading the “busiest” currencies at any given time, you want to be where the action is. Are there any ways to determine that? Well, you could try reading the Forex news to spot the biggest things that are happening in the market now. There’s a place for that, but there are easier ways that can tell you where to begin to focus your search. Although Forex is “over the counter”, there are reliable statistics which tell us which currencies are traded the most, i.e. which currencies are exchanged in the largest volumes. The takeaway headline is that today, about 70% of all Forex trading is between the U.S. Dollar, the Euro, and the Japanese Yen only. The British Pound and Australian Dollar account for another 10%. The U.S. Dollar is by far the most dominant of all these currencies, so it makes sense to focus on each of the other currencies against the U.S. Dollar. You don’t need to open your trading platform and worry about 80 pairs and crosses or wonder whether the Canadian Dollar / Swiss Franc cross is what you should be trading today. It almost certainly isn’t, and if you ever hear anyone telling you about a support or resistance level in a currency cross like that, please ignore them – nobody is watching this cross or its levels!
Narrowing Down the Field
Now you know that it is only worth watching a few currency pairs, you will find it much easier to know which one or ones to be trading any day. The method to use to answer this question in detail, is which of these currency pairs are likely to have the most volatility? You need volatility, because if the price does not move, how are you going to make any money? You need to buy and sell at the widest price differentials you can possibly find, to make the greatest possible profit. There are a few ways to forecast where market volatility is likely to be, and if you apply the methods I outline below, you should get some good answers.
The first thing to know is that statistically, in markets, volatility “clusters”. Suppose the average daily range of a currency pair is a movement of 1% of its value, taken over several days. Suddenly, one day it moves by 3% of its value. Volatility clustering research conducted by data scientists such as Benoit Mandelbrot tell us that this pair is more likely to move by something more than 1% tomorrow, quite possibly actually by an amount closer to 3%. So, when you see a currency pair move by more than its average volatility, that high volatility is more likely to continue than reverse over the short term. Another approach could be to calculate the average true range (ATR) of the past 5 or 10 days for EUR/USD, GBP/USD, and USD/JPY, and calculate these values as percentages of each pair’s price from the start of the period. Whichever has the largest value, is probably the pair it makes sense to focus on tomorrow.
Another crucial factor is trend, or momentum (they are essentially the same thing). The major currencies such as the U.S. Dollar, Euro and Japanese Yen, have, in recent years, shown a greater probability to move in the direction of their long-term trends. One good rule of thumb in trading major currency pairs is asking yourself, is the price higher or lower than it was 3 and 6 months ago, and trading mostly or entirely in the same direction as any long-term movement, if it exists.
If you are trading only during Asian business hours, you will probably find that your best opportunities will involve Asian currencies such as the Japanese Yen and Australian Dollar. I urge you to consider whether you can develop a method to trade longer time horizons, as otherwise you could be missing other opportunities while you are asleep, the same way I missed out on USD/JPY opportunities in 2012. If I had the wisdom to trade daily charts back then, I could have profited from that big movement in the Yen very easily, even at night while I was asleep, with traders in Tokyo doing the heavy lifting for me!
Finally, if you watch an economic calendar to see when the major central bank or most important economic data releases are scheduled for the major currencies, you can see that if you are in a trade before those releases, those releases might provide you with the volatility you need to turn your trade into a big winner, or at least show you where some volatility is likely to appear.
So, narrow your focus to the major pairs, and trade the currencies showing the highest volatility, and watch where the bigger long-term trends are. This should give you the best chance of success in Forex trading.
Source
Which Currency Pairs Should I Trade? | Trading Forex
One of the biggest mistakes made by many Forex traders is not understanding that deciding correctly what to trade, and in which direction, is 90% of the battle to turn a profit. Unfortunately, too many traders focus on trying to perfect entry methods, not realizing that if you correctly pick what is going to up today, for example, then the exact entry method you use is not going to make a major difference to your trading results. You can become an expert in picking entries on the 5-minute chart, but if you don’t pick what to trade using a broader, higher timeframe perspective, it will be of little use to you. Why do traders make this mistake, and how can they decide which currency pair or pairs to trade each day in a more intelligent way?
Why Traders Don’t Consider Pair Selection Carefully
Most traders are eager to start making lots of money. The way to make lots of money quickly, so they are told, is to trade using smaller timeframes – this is at least theoretically true. Traders notice that some currency pairs have lower spreads (such as EUR/USD) and think they should pick such low-spread pairs to trade to save costs. Another common reasoning is that it makes sense to trade those currencies which are most active during the trader’s preferred hours of operation. A further argument says that each currency pair has its own “personality” and you should get a lot of experience trading a few pairs so you can get to know their personalities well, and in this way, trade them more successfully.
These considerations are both rational and truthful, at least to some extent. The problem is, that they are very far from being the most important consideration that should influence which currency pairs you trade. I learned this myself the hard way some years ago when I decided that I would day trade, the EUR/USD and GBP/USD currency pairs full time. Over several months, these two pairs barely moved, while USD/JPY took off like a rocket and provided easy money to anyone trading it. Sure, I knew the personalities of EUR/USD and GBP/USD very well, had a great strategy which had worked extremely well on these pairs for years, and their hours of greatest activity fitted the time zone of my geographical location precisely. Despite all this, my linear thinking caused me to miss out on the only real trading opportunities of 2012, which came in the JPY pairs and crosses.
The #1 Factor to Use in Deciding Which Pair(s) to Trade
So how should you decide which currency pair or pairs to trade? I’ll use an analogy to the world of gambling to simplify the issue: Let’s say you go into a casino to play a game where you need other players to risk money on the table to give you a chance to make profit, i.e. your winnings will come from their losses. This is a good comparison to the Forex market, which works the same way. So, which table would you go to? The busiest one, with the most players and most money on the table, or a quiet one in the corner with just a couple of players there? Obviously, it would make sense to choose the busiest table. So why should Forex trading be any different? You want to be trading the “busiest” currencies at any given time, you want to be where the action is. Are there any ways to determine that? Well, you could try reading the Forex news to spot the biggest things that are happening in the market now. There’s a place for that, but there are easier ways that can tell you where to begin to focus your search. Although Forex is “over the counter”, there are reliable statistics which tell us which currencies are traded the most, i.e. which currencies are exchanged in the largest volumes. The takeaway headline is that today, about 70% of all Forex trading is between the U.S. Dollar, the Euro, and the Japanese Yen only. The British Pound and Australian Dollar account for another 10%. The U.S. Dollar is by far the most dominant of all these currencies, so it makes sense to focus on each of the other currencies against the U.S. Dollar. You don’t need to open your trading platform and worry about 80 pairs and crosses or wonder whether the Canadian Dollar / Swiss Franc cross is what you should be trading today. It almost certainly isn’t, and if you ever hear anyone telling you about a support or resistance level in a currency cross like that, please ignore them – nobody is watching this cross or its levels!
Narrowing Down the Field
Now you know that it is only worth watching a few currency pairs, you will find it much easier to know which one or ones to be trading any day. The method to use to answer this question in detail, is which of these currency pairs are likely to have the most volatility? You need volatility, because if the price does not move, how are you going to make any money? You need to buy and sell at the widest price differentials you can possibly find, to make the greatest possible profit. There are a few ways to forecast where market volatility is likely to be, and if you apply the methods I outline below, you should get some good answers.
The first thing to know is that statistically, in markets, volatility “clusters”. Suppose the average daily range of a currency pair is a movement of 1% of its value, taken over several days. Suddenly, one day it moves by 3% of its value. Volatility clustering research conducted by data scientists such as Benoit Mandelbrot tell us that this pair is more likely to move by something more than 1% tomorrow, quite possibly actually by an amount closer to 3%. So, when you see a currency pair move by more than its average volatility, that high volatility is more likely to continue than reverse over the short term. Another approach could be to calculate the average true range (ATR) of the past 5 or 10 days for EUR/USD, GBP/USD, and USD/JPY, and calculate these values as percentages of each pair’s price from the start of the period. Whichever has the largest value, is probably the pair it makes sense to focus on tomorrow.
Another crucial factor is trend, or momentum (they are essentially the same thing). The major currencies such as the U.S. Dollar, Euro and Japanese Yen, have, in recent years, shown a greater probability to move in the direction of their long-term trends. One good rule of thumb in trading major currency pairs is asking yourself, is the price higher or lower than it was 3 and 6 months ago, and trading mostly or entirely in the same direction as any long-term movement, if it exists.
If you are trading only during Asian business hours, you will probably find that your best opportunities will involve Asian currencies such as the Japanese Yen and Australian Dollar. I urge you to consider whether you can develop a method to trade longer time horizons, as otherwise you could be missing other opportunities while you are asleep, the same way I missed out on USD/JPY opportunities in 2012. If I had the wisdom to trade daily charts back then, I could have profited from that big movement in the Yen very easily, even at night while I was asleep, with traders in Tokyo doing the heavy lifting for me!
Finally, if you watch an economic calendar to see when the major central bank or most important economic data releases are scheduled for the major currencies, you can see that if you are in a trade before those releases, those releases might provide you with the volatility you need to turn your trade into a big winner, or at least show you where some volatility is likely to appear.
So, narrow your focus to the major pairs, and trade the currencies showing the highest volatility, and watch where the bigger long-term trends are. This should give you the best chance of success in Forex trading.
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