The Most Profitable FX Pairs for Scalping
11/27/2013 9:00 am EST
Alexandra Tarlia of Investazor.com strongly believes that it is very important for beginners to know which currencies are best suited for this trading strategy.
As most forex traders already know, scalping strategies involve short-term transactions to bring profit. It can be defined as being a highly specialized trading method, which requires strong technical and fundamental analysis knowledge and favorable technical setup in order for the scalper to profit.
As the technique is oriented towards a specific kind of movement in the market, it is mandatory for the scalper to know which currency pairs are best suited to scalping strategies. Generally speaking, it is desirable to trade the smallest-spread currencies that also have the lowest costs. More precisely, it is recommended that you use the most traded currencies as those have the highest liquidity in the market.
Moreover, these currency pairs are not prone to very sharp movements and therefore give less surprises in the market. We will categorize three types of currency pairs best suited to scalping, to highlight which currencies scalpers must pay more attention.
Please note that these are just examples because the market is in a continuous flux and changes appear all the time. The generic type of currencies is the one that counts, while the particular examples can easily change in time.
The so called majors are the currencies formed by the most powerful and dominant economic currencies in the world. Their major characteristics are liquidity and responsiveness to market shocks.
Nowadays, in this category we can include EUR/USD, USD/CHF, GBP/USD, and USD/JPY. These are the major pairs traded by the majority of the banks all over the world and also by all important institutions and traders, being the most followed by scalping fans. What is important regarding this category of currencies for scalpers is that they move slowly in the markets and that they have the biggest amounts of trading in terms of volume.
Because these are stable currency pairs, scalpers can take advantage of them to accumulate conservative repeated profits.
Carry pairs are those formed by a country whose currency has high interest rate and another that has low interest rate. Their major characteristic is that they are traded all over the world and that they are very volatile. It will be easy to understand that these are not stable pairs, but their evolution and changes directly depend on the evolution of the interest rate.
We often found that the EUR/JPY pair is also included in the carry pairs category. We believe that the case is no longer applicable given the fact that the difference between the interest rates is becoming smaller and smaller: 0.5% for EUR and for JPY tends to 0%.
It is important to point out that it is not advisable for beginners to scalp with carry pairs because at times the spreads widen very quickly and even stop-loss orders are not enough to avoid loss.
Experienced scalpers are also advised to trade them using typical trend-following strategies so as to exploit breakouts and other sharp movements.
Exotic currencies are those formed by at least one exotic country's currency. Their important characteristic is that they are rarer, less-liquid and less well-known forex pairs than the other two previous categories of currency pairs.
It is mostly recommended that only experienced scalpers trade this category, because of the unpredictable gaps that appear frequently.
But beginner traders who have strong knowledge of money management strategies might find them perfect for scalping as well.
By Alexandra Tarlia of Investazor.com