Evaluating Which Currency Pair to Trade

10/04/2012 7:00 am EST


Jeremy Wagner

Head of Daily FX Education, FXCM

As traders, we are not as concerned why something is moving so long as we can pinpoint an entry with a good risk to reward ratio. EURNZD tags the 200 Simple Moving average offering a selling opportunity.

The New Zealand Dollar (NZD) has been one of the strongest currencies over the past month. Therefore, when deciding which currency pair to trade, consider following this trend by purchasing the NZD.

Now, we need to look for good opportunities at good risk to reward ratios. The EURNZD cross pair is offering a clear moving average signal to sell the pair (by selling the EURNZD, you are buying the NZD while selling the EUR) giving us a 1-to-2 risk-to-reward ration

Moving averages are arguably one of the most popular and versatile indicators used in trading. Moving averages are widely followed by traders of all skill level. The strategy we are using today is a 200 Simple Moving Average as support or resistance.

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We can see from the chart above how the EURNZD has clean trends that appear to respect the 200 period simple moving average. Although prices will oscillate above and below the line, they generally find trends to a given side of the indicator. Notice how the chart is generating a series of lower highs and lower lows. This is the definition of a down trend.

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What makes this particular set up appealing is that the EURNZD has shown a recent history of retesting the opposite side of the line once the moving average is broken.

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Therefore, the recent break below the moving average, prices are heading back up for a retest on the bottom side of this line offering a selling opportunity.

To confirm our trade set up, look for an indicator to begin to roll over to the down side. I have used the Slow Stochastic in the above example. Once the Slow Stochastic crosses down, enter the sell trade with a stop loss about 15 pips above the recent swing high. Take profit at twice the distance of your stop loss so you are maintaining at least a 1 : 2 risk to reward ratio.

by Jeremy Wagner, Lead Trading Instructor, DailyFX Education

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