Selecting Pairs to Trade

The FX markets can provide traders and investors with numerous potential opportunities. Traders can get exposure to a vast amount of currency pairs, allowing them to express an opinion on many different currency pairs.

 

Just because there are a lot of pairs to trade, however, does not mean that traders and investors should trade all of the available pairs. Some pairs, such as the EUR/USD, are far more popular, and thus may be far more liquid, than a pair like the USD/ZAR.

 

The Importance of Liquidity

 

Liquidity is extremely important when trading any market. Deeper liquidity may potentially allow the trader or investor to enter or exit positions with less slippage. Although stop prices are never guaranteed a fill at the desired price level, pairs that are more liquid may potentially see execution prices that are at or closer to the desired price level.

 

Deeper liquidity may also provide a tighter bid/ask spread. In addition to brokerage commission costs, dealers make their money from the difference between the bid and ask. For example: The EUR/USD might be bid at 117.00 and offered at 117.04. This means the trader would have to pay the ask of 117.04 to buy, and would have to sell at the offer of 117.00. The trader would also pay any commissions charged by the broker.

 

A less liquid market, such as the USD/ZAR, could see a bid ask spread like 12.4774 at 12.4861. This spread has a considerably wider gap between the bid and the ask, or the prices the trader can buy and sell at. Because the real market is somewhere in the middle, this means that the trader is buying further above the market and selling further below the market, in addition to paying commissions. Needless to say, having a wider gap between the bid and ask prices means that the trader will get a less desirable fill price. Not only that, but if a stop order is triggered, the actual fill price could be substantially above or below the targeted level.

 

Commissions and/or fees should always be a major consideration when trading or investing. The wider the bid/ask spread on a currency pair, the more the trader or investor is paying in transaction costs in addition to commissions. These costs can have a significant impact on net performance and can even make the difference between profits and losses.

 

Traders may, therefore, want to focus their efforts on the most popular and liquid currency pairs. Some of the most heavily traded pairs include:

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • AUD/USD
  • USD/CAD
  • USD/CHF

 

Although traders can trade as many pairs as they like, it may potentially be best to focus on the majors.

 

There is a high level of risk in Margined Transaction products, such as, Foreign Exchange (FX) and Metals trading which may not be suitable for all traders as it could result in the loss of the total deposit or incur a negative balance; only use risk capital.  Prior to trading any products offered by ATC Brokers, please carefully consider your experience level and financial situation.