|Find your pairs!|
Now, let's walk through a method in a little more detail. Step number one includes identifying which pairs you will be trading. Looking at things such as correlation, spread, and how active the pair trades will help you determine if the pair fits your trading style.
Correlation means that the pairs move in relationship to each other. For example, if the EUR/USD goes up, then it is likely that the GBP/USD will go up. This means that they are positively correlated. If you look at the EUR/USD and the USD/JPY, you will notice that they move in opposite directions or that they are negatively correlated. One goes up while the other goes down. Trading pairs that are correlated is like trading one pair when it comes to risk. If you have a position in the EUR/USD and GBP/USD, it is really like having one trade and you may be taking too much risk by buying both since they move together.
Another consideration in choosing your pairs to trade is the spread between the bid and ask price.
You will notice that the more liquid a pair is, the tighter the spread will be. Notice how the EUR/USD has a tight spread and a large amount of trading. Also notice the lower trading of the AUD/CAD and how it has a spread of 10 pips.
The currency pairs and when they are most actively traded will have an impact on the pairs you may be trading. If you can only trade during certain times of the day, you can see which ones are the most active and may be the best ones for you to trade.