When I was a new trader back in 1973, three commodities were about all I could keep track of comfortably. New kinds of information, like fast-moving quotes, can be difficult for the brain to assimilate at first. Ditto currency pairs.
Eight Majors, Twenty-Eight Pairs
If you include the New Zealand dollar, or “Kiwi” (some do, some do not), there are eight “major” currencies traded: Australian dollar (AUD), Canadian dollar (CAD), Swiss franc (CHF), euro (EUR), Great Britain pound (GBP), Japanese yen (JPY), New Zealand dollar (NZD) and United States dollar (USD).
These currencies trade as 28 distinct pairs: AUDCAD, AUDCHF, AUDJPY, AUDNZD, AUDUSD, CADCHF, CADJPY, CHFJPY, EURAUD, EURCAD, EURCHF, EURGBP, EURJPY, EURNZD, EURUSD, GBPAUD, GBPCAD, GBPCHF, GBPJPY, GBPNZD, GBPUSD, NZDCAD, NZDCHF, NZDJPY, NZDUSD, USDCAD, USDCHF and USDJPY.
The Three Sessions
There are three time zones over the 24 hours of a day. For a few hours these zones overlap, and two sessions are going at the same time. The Asian session is a split session between Sydney and Tokyo. Times are quoted in EST.
- Asian session (AUD, JPY, NZD): 3:00 PM to 4:00 AM
- European “London” session (CHF, EUR, GBP): 3:00 AM to 11:00 AM
- North American “New York” session (CAD, USD): 8:00 AM to 5:00 PM
Here is a nice FX calendar that you can adjust to your specific time frame: babypips.com/tools/forex-market-hours
All 28 pairs trade in all sessions but typically (barring unexpected news) are most active in their own session. Currencies in the same time zone also seem to share a general positive correlation, however slight.
50YearTrader Tip: If your stop-loss is triggered when both currencies in your pair are out of session, you may be in for an unpleasant surprise. For example, you are long the USDCAD and your S/L is hit during the Asian session.
By the way, if you are interested in FX correlations (I am!), this is golden: mataf.net/en/forex/tools/correlation
A Nine-Pair Portfolio for New Traders
I suppose if you are using a computer program to trade, it is no big deal to trade all of them. But for a discretionary trader (such as myself) who also has to keep up on multiple chart characteristics, it can be too many. It is definitely too much to ask of a newbie currency trader.
For new traders I suggest a portfolio of nine pairs balanced between the three sessions and their combinations. Call the Asian session “1,” the European session “2” and the North American session “3.” The possible pair combinations are 1-1, 1-2, 1-3, 2-1, 2-2, 2-3, 3-1, 3-2 and 3-3. By selecting a single pair from each combination, the new trader practically has the bases covered. Here is a sample portfolio:
- USDCAD
- EURUSD
- NZDCAD
- GBPUSD
- EURGBP
- CHFJPY
- AUDUSD
- NZDCHF
- AUDJPY
The JPY will always be a back pair by convention. Because you can go long or short any pair, it is not completely necessary to have a specific front currency and back currency order. For example, you can “go long” the JPY by selling an XXX/JPY pair.
How Many Pairs at Once?
How many pairs should you trade concurrently at most? I suggest a maximum of three. For a new trader that is enough to keep track of at the same time.
Jim Bickford’s Theorem of Portfolio Efficiency postulates that if you trade more than three pairs concurrently, your portfolio is inefficient. This means either that you are on the same side of a specific currency, or two with high positive correlation, in multiple pairs, or that you are trading against yourself by being both long and short a specific currency. I have played with this and I believe it actually takes more than four, but I am not going to argue with Mr. Bickford, rest his brilliant soul.
This post is educational commentary. It is not investment advice. Trading futures and FX involves substantial risk of loss.
Good Trading!
Michael Duane Archer
Related Reading
- The Currency Companion Books and Jim Bickford’s FX Studies
- Is the Market a Computer? The Trend Machine Experiments
- Goodmanisms: Charlie Goodman’s Sayings on Trading, Explained
Keep Learning the Goodman Way
If this article was useful, these are the next steps:
- The Method: propagation, intersection and the 3-C Principle, drawn plate by plate.
- The Goodman Library: the books, from Goodman for Grasshoppers to The Goodman 6 & 6.
- The Trader’s Playbook: the Molokai setup in one printed, numbered volume.
- Mentoring: work one-on-one with the authors.