Most Dangerous Currency Pairs And Sentiment
Following up on a question from Ralph who asked us whether there are some currency pairs that is best to be avoided in our trading. So the quick answer to the question is yes. But there is a little bit of explanation required here.
There are some pairs that are extremely volatile to trade and often has very expensive spreads and commission fees to trade them and this would be your more exotic currency pairs. And then there are a few of the major and minor currency pairs that can sometimes exhibit very choppy price action, some Swiss pairs often come to mind with regards to choppy price action.
But having said that, none of those reasons are really any good enough reasons why you shouldn’t trade any specific currency pairs. The biggest and the most important rule and factor that we need to follow when choosing which currency pairs to trade and which ones to ignore is always going to be coming down to whether we are pairing a strong currency against a weak currency or not.
So, whether that means trading something like the Kiwi Swiss or trading something like the Euro NOK, the biggest factor we need to consider is whether there is good enough reason to pair that particular currency, currencies with each other from a sentiment and fundamental point of view. For example, based on the first points mentioned, right, generally speaking trading something like the Euro NOK might be risky due to its volatility, its spread, and its risk sensitivity.
However, if there is a really really good sentiment or fundamental reason to pair the Euro against the NOK then that shouldn’t really be any reason for you not to trade it. That should be the first and the most important consideration for you to, on whether you should trade that pair or not. Now generally, we associate this with the more exotic pairs and the cross currencies and the minor currencies pairs, but this rule is valid for basically trading anything.
Whether we trade something like the Euro US Dollar, or the Pound US Dollar or the USD CAD, if there isn’t a clear sentiment or fundamental based reason for trading that particular pair then we shouldn’t really trade it at all. So, the next time before you take a potential trade or consider a trade, no matter what currency pair it is, always ask yourself the following three questions.
Now firstly, am I trading strong against weak? And obviously provide reasons for your analysis, or coming back to the Euro NOK, maybe you’re expecting the ECB to hike rates and at the same time, we’re expecting oil prices to fall off a cliff then that’ll be a great opportunity to buy something like the Euro NOK regardless of the volatility or the spreads.
Second question, is the sentiment important and more importantly, fresh enough to expect the market to trade inline with that sentiment right now?
So, if you’re looking to trade that Euro NOK right now, ask yourself, okay, I’m pairing strong against weak, check, but is there enough reason for the market in today’s session to trade inline with that sentiment? And, if the answer is no, then maybe it’s best to leave it for another day and wait for the sentiment to be inlined, or be inline with that particular bias. And then, thirdly, do I have a clear exit plan for this potential trade, both technical and fundamental?
So, when you plan that trade, the first one is, am I pairing strong against weak, yes.
Second one, is the sentiment strong and fresh enough for today, yes, and then the third one is, do I have clear, clearly defined labels on the chart where I want to get out of this trade? So, technically, looking at some high probability zones and then from a sentiment or fundamental point of view, what can happen in the market that I need to be aware of that will cause me to immediately close that trade?
Now, being aware of those types of things ahead of, ahead of time is obviously a great help because when it happens, you can immediately just close that trade, so always have an exit plan, both technical and fundamental to take you out of that particular trade.
So, if all of those, if all of those few things check, you’ll find yourself choosing the highest probability pairs more often and that should be your first consideration on which pairs to trade and which ones to rather ignore.