How to Trade Various Forex Pairs - Only Proven Ways
Each Pair Requires a Different Method
Currency pairs tend to work in slightly different ways, and in some cases the differences can be profound. This means that one strategy may work well on EURUSD and yet it may yield too many false signals on EUR/CHF, and vice versa. Each strategy seems to better match few forex pairs. And in the case of day trading or scalping, even the hours of the day play a part. What really matters to a forex trader is:
- Tendency for the market to develop lasting trends
- Relation to risk appetite
- Relation to any commodity price
This is because some pairs are more volatile than others, and volatility itself is not a standard figure, but rather a more complex property. Volatility defines how fast and how profoundly market price moves over a period of time. So you can have small price movements and high volatility, or a mix of various frequencies of price movements, and all kinds of price extremes.
Consider the EURGBP currency pair for example, and try to compare it to EUR/USD for the purpose of swing trading or day to day trading. You will find that EUR/USD gives off far too many false signals, 10 day and 30 day moving averages make no sense, and more. Most importantly you cannot successfully apply swing trading theory to EURUSD. But you can apply all these methods to pairs such as EURGBP. This pair is actually easier to trade, through many more strategies but less widely watched because is not as large as EURUSD, in terms of trading volume. EURUSD is 1/3 of the entire forex market, by volume. And yet it’s one of the most confusing pairs to trade.
EURGBP tends to have a much smoother trend, smoother moving averages that make more sense. And it also works much better for applying swing trading theory. Notice how the trend changes from up to down, at the orange arrows. In EURUSD things are never so simple, there are always false signals. And even when you get a correct signal on the major trend of EURUSD, there are still intraday spikes that breach yesterday’s support and resistance, creating false signals for the day traders.
Now you may ask, what about the positive correlation between EURUSD and EURGBP, aren’t they supposed to move in the same direction, overall? Yes, the correlation is there, however I do believe that it’s a mistake to pay more attention to EURUSD just because it’s so much bigger as market. You are more likely to lose money in EURUSD, than in EUR/GBP. My own strategy is focused on swing trading theory, and I look for solid signals. If there’s conflict relative to EUR/USD, I will ignore EUR/SUD altogether, because I know I cannot trust its trend.
And there are key differences, as EURUSD is a USD cross, whereas EUR/GBP is a different kind of market. Correlations are not so meaningful to me, because I would trade from few hours to several days. But correlations only work well for the longer term.
EURGBP is suitable for day trading, for using swing trading theory, daily LSS pivots, as well as the Parabolic SAR indicator.
The EUR/JPY Currency Pair Methods
EURJPY tends to offer big day ranges, and solid trends similar to EURGBP. But it’s also more compatible with chart pattern trading, such as flags, channels and patterns of symmetry. EURJPY is better than other pairs, for various strategies, and again much better than EURUSD. There are advanced indicators where the opposite is true, and EURUSD works best. But for strategies such as chart patterns, swing trading theory and day trading, EURJPY is better and safer to trade.
Notice a pattern of symmetry on the above EURJPY chart. First comes the first leg of the rally, and then comes a symmetrical in size second leg, making prediction of the high quite easy. Throughout my trading learning curve, I ended up losing a lot of money applying these methods to EURUSD, it just didn’t work. In fact all chart patterns tend to fail in EURUSD, and whenever there’s an anticipation about the Fed changing rates, EURUSD can move in all kinds of crazy ways, days and weeks before the actual Fed rate decision day.
Why the EUR/USD Pair is Hard to Trade
It seems as though EUR/USD being the largest currency pair, gets all the distorted moves in the forex market, and nothing seems to work well for analysis. EURJPY can work well with swing trading theory, large range day trading, LSS pivots, moving averages and more. In fact, if you look closely at the above EURJPY daily chart, you will see that the up trend remains intact throughout the period of the minor up and downs between the two rally legs. There’s not a single sell signal, not one false sell signal, just a solid uptrend. It just follows swing trading theory exactly as the theory dictates.
So what is the problem with EURUSD and other US dollar crosses you may ask, is it the US dollar itself that creates the false signals? It is actually both the US dollar and the sheer size of the EURUSD market, as well as short term dollar effects that spill over to other USD crosses. A large market will always be more likely to produce false signals and more confusion. A smaller market can trade much more smoothly.
Moreover, forex pairs that trade smoothly, such as EURGBP and EUR/JPY, offer one more advantage. You can actually use an ECN forex broker, as an indicator. You can watch the variable spreads of the ECN broker for signs of poor market liquidity, during breakouts. If the spread widens too much, and stays wide for too long, it signals poor liquidity and a higher probability that the breakout will be false! Even this indicator will not work on EUR/USD, but it does work well on many other pairs, such as EURGBP and EURJPY. To find out more about various brokers, both CFD type and ECN type, see the various forex trading platforms. Wise traders prefer to trade through CFDs, but actually do use an ECN broker as an indicator.
In any case, it’s best to pay attention to EURUSD even if you never trade it, but to simply question all the signals you see. In my opinion it’s best to watch the following:
- EURUSD momentum
- EURUSD 10 day moving average
- EURUSD key price levels
These observations are useful for trading the other pairs mentioned here. My advice is to always expect confusion from EURUSD, and solid trends on the other pairs. Momentum from EURUSD can be useful in sustaining trends in other pairs.
The EUR/NZD Currency Pair-Specific Methods
EURNZD is even more different, it works well with everything we discussed so far. And is also very strongly correlated to the price of gold, when gold is priced in Australian dollars. This makes it relevant for analysis on the gold market itself, since the trend of one market can make things clear and easier to understand, on the other market.
Notice how well various indicators and moving averages work on the EUR/NZD daily chart. And because of its ultra strong correlation to Australian dollar priced gold market, one can actually devise trading strategies for gold priced in USD. And then hedge the AUDUSD exchange rate risk, through a trade on AUD/USD!
Gold related strategies can be quite interesting and can get very complex. But there’s one unique thing about Australian dollar priced gold, and EURNZD, they have the strongest, most profound correlation you can ever find in the entire forex market. You can never find so good correlations among two different currency pairs. Here we have gold which is a commodity, Australian dollar and US dollar. And that’s why this correlation is not so easy to spot. But commodity traders have long known about it, and the 3 markets together can be used in a single strategy.
Moreover, the correlation of AUDUSD to gold, is not as strong, and it’s very risky to make assumptions and predictions from one market onto the other. AUD/USD can trade opposite from the direction of gold, for many days in a row! So I’d never use gold signals alone, to trade AUDUSD. Only gold priced in Australian dollars is correlated, very well, to EUR/NZD.
More Insight into the EUR/NZD Methods
As far as day to day trading goes, EURNZD is very solid and will also work well with LSS pivots and various other indicators. I often use Parabolic SAR as a simple indicator for the purpose of showing the major trend, and where to place stop loss orders. Parabolic SAR is not a very good indicator either, but it’s a kind of confirming indicator, in my opinion it’s much better than MACD.
You can find more about risk management on the Investor Greg Forum, and discuss with other traders how they manage day to day risk. My advice is to always use stops on your trades, that are at a distance indicated by the Parabolic SAR indicator. Ideally, you want to avoid advice about using tighter stops, stops that will very likely and unnecessarily be hit. My advice is to use stops on EUR/NZD, that are either trailing type stops, trailing at a distance comparable to the parabolic SAR dots. Or stops that are calculated at least once per week, based on the LSS pivots, either the daily or the weekly pivots.
You could also just test your own risk management idea on EURNZD, and your own unique trading ideas. It’s just that Parabolic SAR, LSS pivots, moving averages, and other simple trading tools, will provide you with the basis for your next idea. If you cannot make money trading EURNZD then you cannot make money on any other pair. Because this pair offers long periods of very smooth price action, where signals work perfectly. Most traders cannot make money, not even on EURNZD because they trade on the news, they trade fast, and rely too much on MACD, RSI and other poor indicators.