Direct from the desk of Dane Williams.
In my opinion, the most difficult forex currency pairs to trade are the JPY crosses and any of the exotics.
If you’re up for the challenge of trying to trade the most difficult forex currency pairs, then understanding the interplay of risk management, technical analysis and fundamental factors will be key.
Today I’m going to take a deeper look at trading difficult forex currency pairs, shedding light on the strategies and considerations essential for success.
By examining the influence of volatility and liquidity, I aim to offer a comprehensive outline before you tackle the unique challenges posed by these highly volatile and thus difficult currency pairs.
Let’s get into it.
Factors that make a forex currency pair difficult to trade
Several factors specific to the personality of each forex currency pair contributes to shaping their difficulty level.
Foremost among these factors is volatility, which refers to the degree of price fluctuations within a given currency pair over a specific period.
For example a forex currency pair moving over 100 pips in a day would be considered highly volatile.
High volatility that can inject significant uncertainty into your trading, making it challenging for you to accurately predict price movements and manage risk effectively.
Currency pairs characterised by high volatility obviously demand a greater degree of skill and precision, as sudden and dramatic price swings can amplify both potential profits and losses depending on your position.
Another critical factor influencing currency pair difficulty is liquidity.
Liquidity represents the ease with which you’re able to buy or sell a particular currency pair without significantly impacting its price.
In highly liquid markets, trades can be executed swiftly and at prices close to the current market rate, meaning you’re able to enter and exit positions with minimal slippage.
Conversely, trading currency pairs with low liquidity is tough, as thin trading volumes will lead to wider spreads and increased price volatility.
You’ve gotta carefully consider liquidity conditions when selecting currency pairs to trade, as inadequate liquidity can make these pairs more difficult to trade.
Why the JPY crosses and the exotics are the most difficult pairs to trade
In my opinion, the most difficult forex currency pairs to trade first include the JPY crosses, which encompass pairs involving the Japanese yen.
1. GBP/JPY
Among these, GBP/JPY stands out as a particularly noteworthy pair.
The popularity of GBP/JPY stems from its substantial volatility, which offers the potential for significant price movements and thus ample trading opportunities if you’re game.
However, this volatility also introduces heightened risk, as sharp fluctuations can lead to rapid losses within short time frames.
To navigate the inherent volatility of GBP/JPY effectively, you must possess a keen understanding of market dynamics and at the very least, employ robust risk management strategies.
2. EUR/JPY
Similarly, EUR/JPY emerges as a currency pair with unique characteristics and trading challenges.
The interplay between the eurozone's economic landscape and Japan's economic policies can introduce complexities into EUR/JPY currency pair.
Economic divergences between the euro area and Japan, coupled with shifts in monetary policy and investor sentiment, influences exchange rate dynamics and at times contribute to extreme volatility in the pair.
To navigate the nuances of EUR/JPY trading successfully, you have to remain vigilant and adapt your strategies to this unique pair.
3. The exotics
Beyond the JPY crosses, all of the exotic currency pairs present formidable challenges.
Exotic pairs typically involve currencies from emerging or smaller economies, such as the Turkish lira (TRY), South African rand (ZAR), or Brazilian real (BRL), paired with major currencies like the US dollar (USD) or the euro (EUR).
These pairs are characterised by lower liquidity and higher volatility compared to major and even minor currency pairs, rendering them inherently riskier to trade.
The limited availability of market liquidity will result in wider spreads and increased slippage, making trade execution more challenging and costly.
Moreover, exotic currency pairs are susceptible to sudden price movements driven by geopolitical events, economic instability or humble shifts in investor sentiment.
While the allure of exotic currency pairs may be tempting, you have to approach them with caution and a thorough understanding of the unique risks they pose to your account.
How to trade difficult forex currency pairs
Implementing robust risk management strategies is paramount to safeguarding your trading account and mitigating potential losses trading these difficult currency pairs.
Just for a start, I’d encourage you to employ a disciplined approach to risk management, setting clear risk thresholds and adhering to predefined stop loss levels.
By diversifying the currency pairs you are exposed to, sizing positions appropriately and avoiding over leveraging, you can mitigate the impact of adverse market movements and preserve your trading account to fight another day if the market goes haywire.
Additionally, maintaining a keen awareness of market volatility and adjusting your risk exposure accordingly will help you overcome the challenges posed by difficult currency pairs, all while still being able to execute your trading strategy.
It's honestly imperative I emphasise the importance of approaching trading difficult forex currency pairs with a thoroughly tested trading strategy and a commitment to your own ongoing learning and personal development.
Don’t slack and you will be able to master trading the JPY crosses and any of the exotics, incorporating them into your strategy at will.
Best of probabilities to you.