Choosing the wrong currency pair will lead you to losses.
Short-term traders should consider the following two points when choosing a currency pair to create a higher number of profitable trades.
Is my trading strategy tailored to trade these times?
Certain times of the day are better suited for certain trading strategies.
High volume trades for most major currencies happen between the end of the New York trading session (around 4 p.m. EST) and the beginning of the European session (around 2 a.m. EST).
Currencies often fluctuate in a range before important U.S. or European economic releases. The worst thing a trader can do is to try to scalp the market tops and bottoms before the economic releases because of the high risk for a loss. If a breakout or trend-following strategy sets up when the European and U.S. markets are both open, then it creates a higher probability trade because there are enough participants in the market to fuel continuation. If a breakout or trend-following opportunity presents itself at any other time, we need to be a bit more skeptical about the quality of the trade.
Is this the best currency pair to trade?
Picking the right currency pair to trade can mean the difference between successful and unsuccessful trades.
There are many cases where the Canadian and US economy data hit the news at the same time. If the Canadian data is weak, common wisdom says that the best currency pair to buy would be the USD/CAD. This also applies if the U.S. economic data is stronger than forecasted.
On the other hand, if opposite is true, then the U.S. dollar and the Canadian dollar could both lower their value, leading to a no-trade of the USD/CAD pair. In that case, it may be better to consider using the US news to trade another currency pair such as AUD/CAD or CAD/JPY, which will be less affected by the U.S. economic data. The same is true if you have a good feel for the European data but the market is bullish toward the dollar for one reason or another. Then perhaps buying euros against the pound is the higher probability trade.
These are judgment calls that short-term traders must make at the time of the trade, and they are important because they can mean the difference between a successful and an unsuccessful trade. It’s worth the extra minute you’ll take before diving into a trade.
The Key Is Yours
You can never be 100 percent certain about whether a trade will be successful or not, but you can increase the probability of it being successful by looking for only high-quality trades.
This extra effort is important if you value your hard-earned money (and I think you should!). I am a big believer in high-probability trading and the questions in this chapter are the ones that I ask myself before every single trade. Trading will always be risky business, but making sure the fundamentals, technicals, and market sentiment support your trade every time will give you the highest probability of success.