Hello traders! This week’s newsletter comes to you from beautiful Colorado, where I’m taking my bi-annual trip to escape the Texas heat. While friends and family encourage me to move there – mainly so they have a great place to visit/vacation!- I can’t decide if the chilly winter and snow will be worth it. But enough about my personal stuff, this week’s newsletter will hopefully help to answer a question that comes up in nearly every class that I teach, namely, what is my favorite currency pair?
When teaching one of Online Trading Academy’s forex classes, I encourage new students to concentrate on just a handful of the potential currency pairs to trade. My recommendations are as follows: EURUSD, USDJPY, and one of our commodity pairs, either the USDCAD or the AUDUSD. The reasoning is pretty straightforward-the EURUSD and USDJPY have very tight spreads (the difference between the bid and ask) indicating lots of liquidity; and occasionally a commodity pair will offer us volatility or movement when the others might not be moving. After a few weeks of getting the “hang” of the forex market, you can certainly add more pairs to your list of potential trading opportunities. The next group would be the rest of the “major” pairs-GBPUSD, NZDUSD and the USDCHF. After a few weeks of that, then the new trader could add several “cross pairs,” basically, any of the major currencies against other major currencies. For example, the EURJPY, AUDJPY, EURGBP, etc. The factors that would go into deciding which pairs to trade include the spreads, margin requirements and the ATR (Average True Range.)
The Average True Range is a measurement of volatility, usually over the preceding 14 or 21 days. According to Investopedia.com:
DEFINITION of ‘Average True Range – ATR’
A measure of volatility introduced by Welles Wilder in his book: New Concepts in Technical Trading Systems.
The true range indicator is the greatest of the following:
current high less the current low.
the absolute value of the current high less the previous close.
the absolute value of the current low less the previous close.
The average true range is a moving average (generally 14-days) of the true ranges.
INVESTOPEDIA EXPLAINS ‘Average True Range – ATR’
Wilder originally developed the ATR for commodities but the indicator can also be used for stocks and indexes. Simply put, a stock experiencing a high level of volatility will have a higher ATR, and a low volatility stock will have a lower ATR.
Here is a chart of the EURUSD with the ATR added to the bottom. Over time, you can see the volatility has fluctuated from a low of about 40 pips per day, to a high of about 198 pips per day. Again, this is the average movement over the preceding 14 days.
So when someone asks what is my favorite currency pair to trade, my answer always ends up being “it depends.” Mainly it depends on who has the highest ATR at the time! As a trader, I prefer to trade the more volatile pairs from the list of pairs previously mentioned. (On a side note, when trading for the rollover/daily interest rate payment, the ATR becomes secondary to the pairs that have the highest payout. But that is a topic for another newsletter.)
As you can see from this table, currently the EURUSD has an ATR of about 151 pips while the GBPUSD has an ATR of “only” 115. Using only this criteria the pair I would prefer to trade would be the EURUSD because it should offer more movement over the next few days. Comparing the AUDUSD’s 97 pips to the USDCAD’s 135 pips per day, the USDCAD would make more sense for the shorter term trader because of the higher ATR.
Please note, however, that the ATR shows WHAT ALREADY HAPPENED. When considering a longer term trade vs. just short term day trading, very often larger moves happen AFTER a period of consolidation (lower ATR.) Another consideration is the difference in pip values in dollar terms as they aren’t all the same! Because some pairs have a pip value that fluctuates based on the price of the pair, a comparison of actual dollar value fluctuations might be more helpful to the advanced trader. This topic is better covered in class or one of our Extended Learning Track online classes.
Back to the “favorite” currency pair, based on the above table, currently the Yen pairs and the EURUSD offer the highest ATR-which would be where I would focus my short term trading-my “favorite” pairs. Over time, my favorite pairs will change as the ATRs change. Again, longer term trades will have the rollover interest added to my decision making for trades held longer than a few days.
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD continues its downward trend for the fourth consecutive day, driven by a stronger US Dollar influenced by the hawkish market sentiment surrounding the Federal Reserve and expectations of prolonged higher interest rates.
GBP/USD: The first downside target is seen at the 1.2600–1.2605 zone
GBP/USD trades on a weaker note around 1.2620 during the early European session on Friday. The decline of Pound Sterling is backed by the growing speculation that the Bank of England will begin the rate-cut cycle this year.
Gold ends Q1 2024 at record highs, what’s next?
Gold is sitting at an all-time high of $2,236, lacking a trading impetus amid holiday-thinned conditions on Good Friday. Most major world markets, including the United States are closed in observance of Holy Friday, leaving volatility around Gold price highly subdued.
Ripple's move above this key level could trigger nearly 50% rally for XRP
Ripple price has overcome a critical resistance level and flipped into a support floor on the weekly time frame. This development happened while XRP tightly consolidated for roughly 250 days.
US core PCE inflation set to ease in February on month as Federal Reserve rate cut bets for June mount
The core Personal Consumption Expenditures Price Index is set to rise 0.3% MoM and 2.8% YoY in February. The revised Summary of Projections showed that policymakers upwardly revised end-2024 core PCE forecast to 2.6% from 2.4%.
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