What is important in selecting a Forex Metatrader Broker?

What is important in selecting a Forex Metatrader Broker?

There are many factors that are important in selecting a Forex Broker. Quality of Execution, Low Spreads, Good Trading Software, Trust and Experience, and Amount of Margin Offered (Leverage). Please remember, the high levels of leverage used in Forex trading can magnify losses as well as gains.

The first thing that most people look at is the spread, and this is very justified. Paying too large a spread can make or break a trader. For example if a trader does three 1 lot trades a day in the Euro at FXCM they will pay $90 and only $60 at FXDD. This 1 pip difference in spread amounts to $600 a month difference!

The most profitable currency pairs

The most profitable currency pairs

Rich from over at forexproject.com has written a post detailing which currency pairs have been most profitable for him. I find his results quite interesting because I think (I haven't actually looked at the numbers) by far the */JPY currency pairs have been most profitable for me as well.

Seeing that someone else has also found these currency pairs to be the most profitable is a good reason for me to focus on these currency pairs instead of trying my luck on the EUR/USD.

Here are Rich's results, I think you'll agree they are interesting!

USD/JPY: +3720
EUR/JPY: +2400
GBP/JPY: +1370
USD/CAD: +890
NZD/USD: +470
USD/CHF: +420
EUR/GBP: -70
AUD/USD: -130
GBP/USD: -$410
CHF/JPY: -650
EUR/USD: -$1430

Currency correlation

Some currencies tend to move in the same direction, some — in opposite. This is a powerful knowledge for those who trade more than one currency pair. It helps to hedge, diversify or double profitable positions.

Statistically measured by performance, currency pairs are given so called "correlation coefficients" from +1 to -1.
A correlation of +1 means two currency pairs will move in the same direction 100% of the time. A correlation of -1 means they will move in the opposite direction 100% of the time. A correlation of zero means no relation between currency pairs exists. Information about current correlation coefficients can be found here: Currency Correlations Table

The example of strong positive correlation between two currency pairs is: GBP/USD and EUR/USD. They have a correlation coefficient of over +0.90, which means that when EUR/USD goes up, GBP/USD also goes up.

A well known sample of two opposite moving currency pairs is EUR/USD and USD/CHF, they have very high coefficient of over -0.90, which means that they move inversely almost 100% of the time!

Examples of same direction moving currency pairs are:


EUR/USD and GBP/USD
EUR/USD and NZD/USD
USD/CHF and USD/JPY
AUD/USD and GBP/USD
AUD/USD and EUR/USD

Inversely moving pairs are:

EUR/USD and USD/CHF
GBP/USD and USD/JPY
GBP/USD and USD/CHF
AUD/USD and USD/CAD
AUD/USD and USD/JPY

How a trader can use this information?
1. A very simple use is avoiding trades that cancel each other. For instance, knowing that EUR/USD and USD/CHF move inversely near-perfectly, there would be no point to go short on both positions as they eventually cancel each other (loss + profit).

1.a. However, there is a strategy of hedging one currency pair with another. Lets' take the same pairs: EUR/USD and USD/CHF. For example, a trader has opened long positions on both currency pairs. Since they move in opposite directions, if EUR/USD is making some losses, the other pair will go in profit. Hence, the total loss will not be as bad as if it would be without the second "backup trade". On the other hand, profits here are not large either.

2. When confident, a trader may double position size by placing same orders on parallel (moving in the same direction) currency pairs.

3. Another option would be to diversify risks in trade. For instance, AUD/USD and EUR/USD pairs have the correlation coefficient of about +0.70 which means that pairs are moving mostly in the same direction but not as perfect (which is what we need here). If we decide that USD is going to weaken, for example, we will go long and place half of buy order on AUD/USD currency pair, and half on EUR/USD. Splitting the orders will preserve trader's positions from sudden losing rallies (sudden "jumps" in price); and as these currencies move not 100% identical a trader will have some time to react adequately. Different monetary policies of different countries' banks also create an impact: when one currency will be less affected than the other and therefore will move slower.