How to Decide Which FX Pair to Trade
08/01/2012 7:00 am EST
Walker England of DailyFX.com outlines three considerations every currency trader should evaluate when deciding which currency pair to trade.
With so many currency pairs to choose from, it can often be overwhelming for a new trader to decide which currency pair to trade. To decide which pair is optimal for trading, we should sort our options by considering both trend and rollover rates.
Today, we will specifically be comparing the EUR/JPY and AUD/JPY currency pairs to see the advantages of trading euro crosses (currency pairs that do not include the US dollar) in present market conditions. Here are the considerations:
1. Strength of Trends
Regardless of your trading strategy, it is important to evaluate the direction of the trend. Below we have daily charts for both the EUR/JPY and AUD/JPY. Looking at the EUR/JPY, we can see the pair is working on creating new lows under 94.46, and declined as many as 1716 pips through present prices.
On the other hand, the AUD/JPY has declined as much as 1,417 pips through the same time frame, but has not established a new low in over six weeks. Both pairs are trending lower from their 2012 highs in March, that much is clear, but we can see that momentum is clearly on the side of the EUR/JPY.
With the EUR/JPY making lower lows and having a stronger trend, which pair would you prefer to trade?
Next: 2. Rollover Rates|pagebreak|
2. Rollover Rates
Strength of trend is not the only consideration we should take into account when opening a position. Every good trader will always keep their eye specifically on costs that can eat into potential profits. “Rollover” is one of those factors, and can either work in your favor or against it.
Rollover is the interest paid or earned for holding a position overnight. The target interest rate associated with each currency (generally set by that currency’s Central Bank) is listed on the home page of Dailyfx.com.
As each individual currency has an interest rate associated with it, set by their central reserve bank, traders have the potential to earn or pay interest based off of these numbers. Ultimately, this will be decided if we are holding a currency with a higher or lower overnight interest rate.
You can find a list of current overnight and central banking rates listed above, but let’s again shift our attention to compare our EUR/JPY and AUD/JPY pairs.
Since we are looking to sell both pairs with the trends mentioned above, we need to focus our attention on “RollS.” RollS is the amount we will either be paying or earning for selling either the EUR/JPY or AUD/JPY currency pair. We can find this number inside of our trading platform and is displayed above in the dealing rates window for both the EUR/JPY and AUD//JPY currency pairs.
Notice the highlighted RollS boxes, and how we are paying $1.43 in rollover per lot traded on the AUDJPY? This is due to the fact that the Aussie dollar maintains a much stronger banking rate relative to the Japanese yen.
The EUR/JPY currency pair is exactly the opposite. We actually get paid 3 cents for selling this currency pair! While getting paid 3 cents a lot in profit is not exactly a windfall, we are not paying for the privilege of selling the currency pair as we are for the AUD/JPY. Taking this into account, rollover is an additional advantage of trading a euro cross over another currency pair.
And the Winner Is?
As we can see through the analysis above, it is beneficial to consider different currency pairs prior to executing a trade. With momentum and rollover clearly on the side of euro crosses, they ought to be sought out for future selling opportunities.
It should be noted that the EUR/JPY is not the only euro cross available for trading. The EUR/USD, EUR/GBP, EUR/AUD, and others can all offer exceptional trading opportunities. What currency pair will you be trading?
Walker England is a trading instructor at DailyFX.com.