Have you ever wondered how to select the currency pair you should trade? Well, the answer to that question is pretty simple: buy the expected strong currency and sell the expected weak one.
How do you do that? The answer lies in the fundamentals. If you expect the JPY to appreciate because of some risk off sentiment, then you buy JPY and sell the AUD, which is the commodity currency that generally performs the worst in risk off scenarios. In this case you short AUD/JPY.
Let’s see another recent example. In 2021 with inflation running way above the Fed’s 2% target and slowing global growth caused by inflation and China, you would expect the Fed to tighten policy earlier and even faster than expected. So, you think the USD is going to be strong. On the other hand (even if all the USD pairs are affected by USD strength or weakness) you see that the AUD having a dovish central bank and being more exposed to the slowdown from China is going to be weak. Therefore, you look for short opportunities on AUD/USD.
If you trade two equally strong currencies with maybe both their central banks in a hiking cycle and both of them being risk on currencies, you will most likely have a hard time, because the pair may just range and vice versa for two equally weak currencies.
So, if you have a good idea on one pair only, then trade just that pair. I can’t stress it enough that your job is not to trade but to make money. Don’t make the rookie mistake of selecting pairs just because they’re more volatile than the rest. More volatility doesn’t necessarily mean more profits.
This article was written by Giuseppe Dellamotta.
