Many a times, traders find themselves at a crossroads on which combination of currency pairs to trade. This is especially common with new traders. But is it really necessary to trade more than one currency pair?
Advantages of trading many pairs
- You get more entry opportunities. When one pair is sluggish with no clear signs of entry, another may be active.
- Profits may be multiplied across multiple pairs. If you trade say EURUSD, GBPUSD, USDJPY, AUDUSD together, you have four pairs with a common currency in them(USD in this case). If some high impact news affecting the USD came in, and you made an entry in the favorable direction, then you will have four trades in profit.
- Profitable pairs may cancel out loses from other pairs.
Disadvantages of trading many pairs
- It takes more time and concentration to analyze and follow up on many different charts. Basically a person trading say five pairs will be doing five times the work a person who trades a single currency pair does in regards to chart analysis.
- Losses may be multiplied across multiple pairs. In the advantages we saw that profits could be multiplied across multiple related pairs if the market moved in one’s favor. The reverse is also true if the market moved against you.
- Losing pairs may cancel out profits from the profitable pairs.
Advantages of trading only one pair
- It requires less input. Less input equals less stress and less confusion.
- It may be less risky for your account when the market moves against you.
Disadvantages of trading one pair
- You may miss opportunities that exist elsewhere. When your pair is sluggish, you may stay longer without trading or even get stuck with one trade while trading opportunities appear in other pairs.
- Recovering from loses may take longer since you are trading less.
- The trader may get impatient and make wrong decisions.
So which is best?
In my opinion, especially if you are not an institutional trader, you shouldn’t really be analyzing many pairs. Trading one pair can still make relatively the same profit. Take for example someone opening trades of 0.1 lots on five different pairs and another trading 0.5 lots on one pair. The one doing one pair will have less trades, but not necessarily lower profit.
A trader should find the few pairs that are most profitable with their strategy and concentrate on them. He/she should not feel compelled to analyse more than what they are comfortable with. More pairs doesn’t always mean more profit. Profit is all about having a good strategy and applying good money management.