This week’s question comes from Mimi, who asks:
How do you choose your pairs to trade and do you consider weak/strong currencies to pair and trade? I have found that many traders get “stuck” on the same pairs, but as currency traders we surely have to look at which currencies are weak/strong.
The only way we make money as currency traders is to find and exploit the strengths and weaknesses of one currency versus another.
Everything is relative, so the greater the divergence is between the two currencies, the more money we stand to make.
That’s the name of the game – find and trade the strongest currency against the weakest currency.
But to do that successfully, you need a quality buy or sell signal. You also need a solid plan.
Otherwise, you’ll quickly find yourself buying into resistance and selling into support. And with no plan or strategy in place, you’ll drain your trading account faster than you can say Forex.
But I’ve talked about strategies and plans before. Today we’re going to focus on relative currency strength. Specifically, how to find the strongest and weakest currencies to trade.
Use Currency Crosses to Your Advantage
Currency crosses are one of the most overlooked aspects of trading Forex. Sure, they don’t offer the kind of liquidity as the majors, but when it comes to determining currency strength and weakness, they’re unparalleled.
A cross is any currency pair that does not include the US dollar. These include the EURGBP, AUDNZD, EURCAD and the EURAUD to name a few.
If you want to learn more about currency crosses, see this lesson.
Let’s assume for a moment that you’re considering shorting the EURUSD. The pair has been weak lately and looks poised to continue lower.
But a glance at the GBPUSD paints a similar picture. The pair is breaking down with no immediate support in sight.
So how do you choose which pair to short?
All things being equal, the EURGBP holds the answer. It’s going to help you determine whether the Euro has been and may continue to be weaker than the pound or vice versa.
Looking at the EURUSD and GBPUSD won’t give you that kind of insight.
Now, what do I mean by “all things being equal”?
With the example above, we aren’t concerned with technical patterns or price action signals. We also aren’t taking into account risk to reward ratios or scheduled news events.
Let’s take things one step further.
Using the same example, let’s assume the EURGBP looks relatively bearish. It’s been moving lower for a couple of months and appears to have room to continue lower.
With this new information, you decide that the Euro is the logical currency to short of the two. And I would agree with you, at least on the surface.
But here’s the deal…
We still need a valid trade setup if we’re going to short the EURUSD. Just because we’ve discovered that the Euro is likely to be weaker than the pound in the future does not justify an entry.
So you see, while this is an excellent way to determine the relative strength and weakness of non-US dollar currencies, it is not all-inclusive nor is it foolproof.
It’s merely a way to fine tune your analysis.
We can apply this same technique to crosses such as the AUDNZD, EURNZD, GBPNZD, etc.
Keep It Simple and Have a Plan
While I love talking about this subject, it can be a slippery slope if you aren’t careful.
Let’s say you see the AUDUSD and NZDUSD heading south in a hurry. You take a look at the AUDNZD, and it too is plummeting.
Based on what we just discussed, you decide that the AUDUSD has more downside potential than its counterpart, the NZDUSD.
So you head over to your trading platform and sell the AUDUSD, hoping to capitalize on the apparent divergence.
But here’s the thing…
Where is support? Was there a valid sell signal? Where is your stop loss? What would negate the setup? Is there any scheduled event risk for the Aussie?
If these questions are left unanswered, you’ve just committed a Forex sin – you chased the market.
Worse yet, you chased the AUDUSD without the presence of a quality sell signal or a solid plan in place.
So you see, taking this notion of strongest to weakest currency out of context can be dangerous. That’s why it’s so important to keep things simple and always have a plan.
In fact, if you are just starting out, my suggestion is to forget about this entire concept of using currency crosses. It’s great information to have and can certainly help you plan your trades, but it isn’t vital to your success.
It’s my opinion that you should only consider using this technique once you’ve built a strong foundation using key levels and price action strategies.
The currency crosses are your key to discovering the strongest and weakest non-USD currencies.
But as useful as this technique can be, it’s important not to get bogged down by it.
A far better use of your time is to focus on things like key support and resistance, price action signals and technical patterns.
Like everything we do, keep it simple and always be sure that what you’re doing fits your style. Because it’s not about finding what works best, it’s about finding what works best for you.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.
CAN A TRADER WITH INITIAL CAPITAL OF 500 DOLLARS TRADE ON DAILY TIME FRAME SUCCESSFULLY. WHAT COULD LIKELY BE THE TRADER STOP LOSS AND PROFIT TAKEN VALUES.
Thanks for the question. I’ve added it to the list for next week. Cheers.
Which time-frame is best to mark up Support& Resistance for day trading please
Thanks for the question. However, I don’t day trade, so I’m probably the wrong guy to ask.
Use Currency Crosses to Your Advantage: great article and thought provoking.
To step back though, and I’m sure you have answered this in the past, what is your process to find the preferred pair to trade in any one session? Do you rely on news releases to move the market? Your input will be appre\ciated as I find this a real challenge each day to recogniose the best pairs to watch and have on my watchlist. Due to my location I am only able (capable) of trading the London session as I find little movement if there is no news in Asia session. The US session is too late for me. Your thoughts will be appreciated
I don’t trade based on sessions. I use the 4-hour and daily time frames. As such, I look for moves that can last a few days or even weeks. This site is filled with posts on the kind of price action I look for.
Can you recommend a reliable Forex Broker?
Jordi, email me and I’ll share my thoughts.
I need to know which reliable forex broker that you can recommend for me . Thank you .
Here you go:
great explained sir..it surely helps to be well planned and double check before we enter a trade…sir i have humble request to you to routinely update gbp/jpy and eur/jpy pairs as its play from last few months looks to be volatile and could be fruitful if approached with well setups..and i admire your way of setups…it could be a blessings to many who have lost there way in trading..GOD BLESS
Jakin, I only comment on favorable price action, so I’m not going to agree to include the same pairs every day.
Thank so much, I’ve learnt from you. Here is my question: I learnt some brokers do trade against their clients expecially doing a big news hour, maybe they are not geniue or not a registered one. How do we know if a particular broker is well registered and reliable to trade with. Because their is some controversy on the broker am currently trading with.
My pleasure, Moshood. Thanks for the question. I’ve added it to the list for future posts.
please ass me aswell
ment add sorry
Hi, Thanks for this lesson. To complement this lesson I simply use the currency strenght meter from Oanda (https://www.oanda.com/forex-trading/analysis/currency-heatmap) to determ the strenght of a currency, Saves a lot of time and tributes to avoid analysis/paralysis.
Marcel, thanks for sharing. One thing I will say is that no tool will ever be as useful or comprehensive as the analysis that you perform yourself. That’s why I always suggest that traders learn to perform their own analysis rather than rely on third-party indicators or tools.
Thanks for your lessons Justin. Would you be so kind to discuss the various sell and buy signals that you frequently or commonly look out for when trading. Especially after identifying support and resistance.
Kendrick, you’re welcome. Sure, I’ll consider this for a future post. In the meantime, be sure to browse the lessons on this site. There are several posts that explain the strategies I use. https://dailypriceaction.com/free-forex-trading-lessons
I was wondering, what would you advise to someone who struggling with consistency, to trade only one currency pair and focus on it, or look at the few pairs at the same time for more opportunities?
Excellent question, Ekaterina. I’ve added it to the list for future Q&A posts. Thanks.
How true you are when commenting on the various indicators for determining weak/strong and you you hit the nail on the head, they meaningless unless you know support /resistance. I wish I had never come to buy one.At least I leanrt the correct method and your comments reinforces my findings
You’re exactly right, Michael. But hey, the best way to learn is by trial and error.
Hi Justin, I have question about playing counter trend moves. Have You got some rules for that kind trades?. What’s your criteria to decide play or not?
Hi Karol, thanks for the question. I’ve added it to the list. Cheers.
Hi Justin, what is the Elliott Wave and does it work as part of price action trading or is it just another indicator?
Siboniso, I don’t use Elliott Wave, but I did write about impulsive and corrective waves here: https://dailypriceaction.com/free-forex-trading-lessons/impulsive-corrective-waves
I think its better not choosing which pair to trade but redistribute your risk according to the relative strength. On the example of EURUSD and GBPUSD, if EURGBP is down then you could put 3/4 of your position on EURUSD and 1/4 on GBPUSD for example. Also, you can use EURGBP to decide when to close your position, if EURGBP is losing bearish momentum, its time to close your positions (if there is also some technical reason for doing it).
Marco, you could do that as well. I prefer to trade each pair based on its own merits, but finding what works best for you is the key.
what forex broker are u recommending
How to get information on currency strength against each other in forex trading
How to get information on currency strength against each other in forex trading
thank you for this article, but may i ask, you said this
“In fact, if you are just starting out, my suggestion is to forget about this entire concept of using currency crosses. It’s great information to have and can certainly help you plan your trades, but it isn’t vital to your success.”
what do you mean by this that like me a newbie, i should not trade currency crosses and just trade on major currencies or to just not give so much attention to what you teach in this article in determining the strength and weakness of the currency?
thank you for your answer.
This is an awesome post, cant believe I just found it now, i currently use currency index to compare the strenght and weakness of pairs it has increased my winning percentage .
Thanks, Isaac. Glad you found it useful.
Please I want to ask where the money a person made in forex come from?Must a person lose Money before another person can make it
what no of indicators is recommended while analysis the market
Preferably none at all.
please can can i use currency strength meter to determine the strength before entering a trade
hi if i not to sure which currency to buy or sell how can i find out to make sure
I want to ask a question…
I’m a newbie in the FX world, and somethings confuses me alot….
Please Mr JUSTIN in an up trend or a down trend how will one know what currency is currently going the way of the trend…..?
How can one know which currency is weak or strong….?