How Many Currency Pairs Should You Trade?

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Let’s talk about:

  • Advantages of Marrying One Currency Pair
  • Problems Associated With Specializing in One Pair
  • Trading Multiple Currency Pairs for Diversification

If you are trading only one currency pair, there are some advantages. The aim is to become familiar with its nuances so that it becomes easy to predict its moves and “understand its news”. In this way one has the edge from having a fair idea of the likely price direction ahead of time. If the currency pair you decide to marry is trending in one direction, up or down, it is possible to trade with the trend, and the trend becomes your friend for as long as it lasts. Trading only one currency pair allows the trader to concentrate all time and effort in one place, so there is less distraction. If you are using for example a low time frame scalping method, trading only one currency pair allows you to focus well. Imagine using a 1 minute time frame scalping method to trade multiple pairs.

But what if both currencies in the pair suddenly become very strong when compared to each other? Trades which were previously possible from the technical analysis related to strong trending markets begin to disappear. The same is true if both currencies in the pair become weak in comparison to each other. In addition, many traders are not in favour of trading a single pair because the number of trades which they can get into becomes significantly reduced. This makes them feel that by not getting into available trades from other currency pairs they are missing trading opportunities and leaving money on the table.

Consolidation is an issue faced by single currency pair traders. Suppose that currency pair adopts a pattern of consolidation within a tight range of only a few pips over a number of days, weeks or even months? Where would the trading opportunities come from? Well, in fact there would not be a lot of low risk trading  prospects and this might leave you being a very frustrated trader.

This takes us to the idea of trading multiple currency pairs. By diversifying your trading portfolio, this allows you to be able to scan numerous currency pairs to find trading setups with promise the highest probability for possible winning trades. One advantage of trading multiple currency pairs is the ability to make the most of currency correlations. Here you may trade the two or more currency pairs which are correlated to increase your odds of being successful. Then there is the advantage of being able to apply different trading strategies based upon the technical or fundamental analysis applicable to particular currency pairs. A third advantage of trading multiple pairs is being able to pair currencies based upon their relative strength. If currency A is strong and currency B is relatively weak, then there will be a buy bias towards the AB currency pair, given that there is sufficient volatility. The trader is then able to search across many currencies and pair them along relative strength versus weakness criteria for increased trading options.

When it comes to deciding whether or not to stick to one currency pair, there are pros and cons. Sometimes making the decision really depends on the trading style and expertise of traders, and the level of exposure of capital they are able to commit to.

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Written by Ferl Ngningone

 


Ferl is a former Financial Analyst at BNP Paribas and a well-seasoned globe trotter. Besides trading online he enjoys traveling more than anything.