Do you think the choice of currency pairs in trading makes a difference and you wanna know which ones work? Let me share with you the best forex currency pairs to trade and how choosing wisely helped me gain success in earning profit through trading.
What are currency pairs?
Forex trading in a nutshell is basically exchanging one currency for another. This means that when you trade, you are dealing with currencies. In every trade, you choose a pair of currencies. Placing an order for a currency pair means buying the first listed currency in the pair or the base currency, and selling the second listed currency or the quote pair.
But what exactly are currency pairs? A currency pair is a comparison of the values of two currencies – the base currency and the quote currency. Every currency is represented by a three-letter code called the ISO currency code. The US dollar is represented by its ISO code which is USD. One example of a currency pair is the Euro-US dollar pair (EUR/USD). Euro which is the first one is the base currency while US dollar is the quote currency. Usually, the base currency is the trader’s domestic currency. The price of a forex currency pair is an expression of how much of the quote currency is needed to buy one unit of the base currency. For example, EUR/USD 1.85 indicates that $1.85 is required to buy one Euro.
Types of currency pairs
There are three types of currency pairs: the majors, minors, and exotics.
- Majors – they are the most popular and most used currency pairs in trading. This is because they all include the US dollar which is the generally the domestic currency of most traders. The major currency pairs tend to have the most liquid markets and trade 24 hours a day Monday through Thursday. They are the most liquid among the three but are also risky to use as higher liquidity means higher competition. Major currency pairs include: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, and USD/CAD.
- Minors – they do not include the US dollar but includes at least one of the major global currencies like the Euro. These pairs have slightly wider spreads and are not as liquid as the majors, but are still sufficiently liquid markets. The lower liquidity may be an issue for some, but the lesser competition it brings is also an advantage for others. Some examples of minor pairs include the EUR/GBP, GBP/JPY, and EUR/CHF.
- Exotic/Crosses – exotic pairs do not include the US dollar just like the minors but they do not need to include at least one of the major global currencies. Basically, they are just pairs of any non-US dollar currency. They include currencies of emerging markets and have lower liquidity. However, their spreads are much wider. Examples of exotic currency pairs are JPY/NOK and NZD/SGD.
What makes a good currency pair?
Deciding on your choice of currency pairs usually depend on the following factors (wikijob.co.uk):
- Trading schedule – the time of the day you usually trade makes a difference if you take into consideration the following: opening in Asia, moving next to the Middle East, followed by Europe and London, and finally, New York and the US. These trading areas will not be open continually or at the same time. Therefore, the currency markets available for you to choose from depends on the time of day when you trade.
- Liquidity – it provides the trader with the greatest ability to trade that pair on the forex market. Since most traders usually want to trade currency pairs that they can easily buy and sell, liquidity remains to be the key factor in choosing currency pairs to trade.
- Price stability – the price stability of a currency pair depends on the economic health of the nation or nations connected to that currency. For example, the price stability of the GBP/USD pair depends on the economic health of the United Kingdom and the United States. Thus, choosing a currency pair to trade asks a trader to consider the likely economic climate in such countries.
- Predictability – currency pairs have historical data/background showing their past and estimated future performance. However, currency pairs do not have equal amount of data and the performance of those which are newer in the market or those who carry less data are harder to predict. This is why most traders choose to trade major currency pairs because they have the most amount of historical data.
Majors – the best currency pairs to trade (Part 1)
- EUR/USD – the Euro to US dollar pair is by far the most widely-traded currency pair in the world. Both the Euro and the US dollar are stable currencies as they represent the two major global economies in the world. The euro alone is the official currency of 19 countries in the European Union. Accordingly, this pair is highly liquid, and the linked exchange rate relies on the European Central Bank, the US Federal Reserve interest rates and NFP announcements.
- USD/JPY – the US dollar and Japanese yen is also a highly liquid major pair. The value of yen sees a number of daily fluctuations, but the central banks of Japan frequently buy and sell the currency all together to keep exchange rates under control. It is being kept low by the Japanese government to establish a competitive export market. The exchange rate for this pair relies on interest rates set by the US Federal Reserve and the Bank of Japan.
- GBP/USD – United Kingdom, despite being a part of the European Union until 2016 remained to use the British pound as its currency instead of Euro. The GBP is the 3rd most-traded currency, next to USD and EUR. The linked exchange rate for this pair is reliant on interest rates set by the Bank of England and the US Federal Reserve.
Majors – the best currency pairs to trade (Part 2)
- USD/CHF – The CHF or the Swiss Franc which is the official currency of Switzerland, is largely considered to be a “safe-haven” currency as it is generally seen as a safe investment during times of economic and political turmoil. This is because of its volatility which means that when other currencies lose value, the CHF will most likely appreciate and vice versa.
- AUD/USD – The Australian dollar which is the official currency of Australia is intrinsically correlated with the commodities market, as Australia remains 1 of the largest exporters of coal and iron ore in the world. It is the sixth most traded traded currency pair and is closely associated with the Canadian dollar. Factors that affect this pair include the value of commodities exported by Australia such as iron ore, gold and coal, and the interest rates set by the Reserve Bank of Australia and the US Federal Reserve.
- USD/CAD – The values of the Canadian dollar and the US dollar are closely related. Just like the AUD, the value of the Canadian dollar is also heavily correlated with commodity prices. Thus, One factor to monitor for this pair is Canada’s reliance on the price of oil, its main export.
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