Choosing an Optimum Pair to Trade

This issue can be approached differently.

One approach is based on the like/dislike basis, used/not used to the pair. This approach can be left outside this small research is it cannot be analyzed in any manner. There is one thing I can say: the best is the enemy of the good. If you have a favorite pair you trade and generate profits, don't change it for anything else.

The second approach is purely mathematical. You are speculators and your profits depend on how strong the fluctuations are, your minimum risk for a pair is defined as its spread. This is why, to find out what is more beneficial for you as a speculator, just take the average fluctuation range for pairs in question and compare it with the spread offered by your broker. For example, I took and compared volatility data from one popular website with trading conditions of a large DC. Have a look at what we have:

First columns include average volatility of seven major forex pairs, then the spread for each pair, the following columns represent volatility divided by the spread. What do these simple calculations demonstrate? We get the pair's size of fluctuation per one unit of its minimum risk. The higher the resulting value, the more beneficial it is to trade the pair from the mathematical point of view. The winners' trio looks this way: top place - EURUSD, second and third - USDCHF and GBPUSD, respectively.

Of course, you may have your own volatility data and the broker's spread values. These are sample calculations. At any rate, I suggest making them independently not only for majors, but also for crosses. Calculate the average daily volatility for the past year yourself and compare it to the spread.

The third approach to defining the best instrument lies in a plane that combines personal preferences and objective parameters. This is where we assess how hard or easy it is to trade a certain pair. Simply put, we need to see the charts. I take one period for the above majors as material for research.

EURUSD

GBPUSD

 

USDCHF

 

USDJPY

USDCAD

AUDUSD

NZDUSD

 

I would like to point out that these are tick charts, i.e. the more active the pair is, the longer the chart will be for the same period of time.

It is rather challenging to evaluate one chart as compared to another in terms of trading ease. This task is usually performed 'by sight'. For example, one can have a look at pairs where stops were taken, pullbacks are deeper, candle wicks are longer etc. There are objective methods that evaluate how smooth the chart it, how much the length of an individual candle deviates from average values for this chart. The smoother the chart, the more equal candles it has and the simple it is to trade it. This criterion, for example, rules out the YEN right away with its periodic spikes. Now, off the top of my head, AUDUSD, NZDUSD and USDCHF have the easiest and smoothest charts. The euro, pound and Canadian dollar are not in a clear trend and have very deep pullbacks. In terms of the shape, New Zealand's dollar has the best chart.

So, it appears as a result of our today's little research that USDCHF wins overall. NZDUSD has the easiest chart to trade but is mathematically least profitable.

I suggest you make your own research and include crosses as potential leaders in terms of a number of indicators.

Head of the DFWA Department Ilya Pressler (VeloVelo)

 

 

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