The foreign exchange market is vast and varied, but some currency pairs stand out for their predictable behavior. These pairs tend to move in patterns that are more easily discernible, even before technical analysis is applied. Identifying these patterns is crucial for developing a robust trading strategy.
With more predictable currency pairs, key support and resistance levels are typically respected more consistently. As the price approaches these lines, its momentum often wanes, suggesting a potential bounce. If the pair lacks the strength to break through, the support or resistance level acts as a springboard, pushing the price back towards the center of the established range. This kind of predictable behavior is highly valuable for traders. Conversely, when a breakout occurs, the pair typically moves away from the line and establishes a new, higher or lower trading range, following a similarly predictable pattern within uptrend or downtrend channels.
In contrast, less predictable pairs can be chaotic. Their price action can be choppy, making it difficult to apply range-trading strategies. False breakouts and erratic movements become commonplace, challenging even the most seasoned trader. These unpredictable shifts can undermine even a well-designed system.
It’s essential to understand that some currency pairs will align better with your trading system than others. If none of the pairs demonstrate predictable behavior within your system’s framework, then it might be necessary to reconsider your approach. However, if your system proves effective with certain pairs, it’s likely they possess a higher degree of predictability and consistency.
Identifying More Predictable Pairs
While not a hard and fast rule, currency pairs with higher trading volumes tend to exhibit more predictable patterns. This often means that exotic currencies and complex crosses, with their lower liquidity, may prove less predictable. However, this is not always the case, and the most popular pair, EUR/USD, can sometimes become less predictable due to fundamental factors like the ongoing European debt crisis, despite its massive trading volume.
Furthermore, patterns observed on charts are not static. Fundamental market forces can have a significant impact on price behavior, constantly shifting the dynamics and predictability of pairs.
As such, the predictability of currency pairs is subject to change. Regular quarterly reviews of the pairs you trade can help prevent situations where your system, while excellent in principle, is losing trades because the pair you are trading has become less predictable. It may be necessary to adapt your approach or transition to another pair that demonstrates greater predictability. Understanding this dynamic nature of the market, and seeking out predictable environments, is key to consistent success.
Want to trade forex? Here’s a list of forex brokers to check out plus analysis and predictions for major currencies.
