For you to join the world
of Forex as a trader, it is important to know what currency pairs are and the
most traded currency pairs. A lot of traders are usually overwhelmed by the
number of available currency pairs they come across. In the selection of your
most profitable currency pair, it is advisable to examine the different pairs
you come across against your trading strategy to help determine the most
profitable Forex pairs to trade on your account. When trying to choose the best
currency pairs you might need to consider the market volatility and spread apart
from your trading strategy.
Forex trading involves
buying and selling of currencies in pairs.Currency trading dates as far back as
when Forex started. Back then before the internet surfaced, currency trading
was quite difficult for individual traders simply because Forex trading was
capital intensive such that only multi-national firms and extremely rich
individuals could dive into this pool of wealth. The Internet helped make Forex
trading easier for individual traders who were not high net-worth individuals
as online brokers now offer high leverage to individual traders which makes
them control a huge trade with a relatively low account balance.
As mentioned above, Forex
trading occurs when the buying and selling of currency takes place
simultaneously. Now together this two currencies form what we call a “currency
pair”. A lot of newbies wonder why currency pairs are written in three letters,
this is because the first two letters represent the name of the country and the
third letter represents the name of the currency. E.g. USD- United States Dollar,
JPY- Japanese Yen etc.
Currency pairs are usually
determined by the amount one currency is worth in relation to another currency.
The first currency in the pair is known as the “base currency” and the other currency in the pair is the “quote currency”. The base currency is
the one that is usually first quoted in a currency pair. For example, in the
EUR/USD pairing, EUR is the base currency while USD is the quote currency.
Profit making in Forex
depends on the movement of currency pairs, what this means is that currency
pair either moves higher or lower. It is either the base currency strengthens
or weakens or the quote currency strengthens or weakens. Both the base and
quote currency never remain stagnant they are always changing.
In a pairing of both
EUR/USD, if the base currency which is EUR were to strengthen and the USD is
static, the currency pair would rise but in a reverse case, the pair would
fall. On the other hand, if the quote currency (USD) were to strengthen, the
pair will fall, but if the USD weakened, the Euro would gain relative strength
against its counterpart pair the USD.
You
might have observed that when a specific currency pair rises, another currency
pair falls inversely. Even as at when the currency pair falls, another currency
pair falls as well. What you might have observed is what we term as currency
correlation. This can be observed only if you are the type that watches charts.
Just as the name implies, in the simplest form, we can define currency
correlation to be the study of the movement of two currency pairs in the same opposite
or similar direction over a certain period of time.
For
traders who plan to trade more than one currency pair at a time, it is
important for them to learn how different currency pairs move in relation with
one another. A lot of traders especially the newbies, who are trying to
maximize their profit as much as they can, try to trade multiple currency pairs
at the same time. By doing this, they might not be aware of the risk they are
putting their trading account into.
Currency correlation can be divided into two:
A positive correlation means that the
values of two variables move in a similar direction, while a negative
correlation means they move in the opposite direction.
Correlations
can provide opportunities to earn a huge profit and they could also be used to
hedge your Forex positions. When traders are certain that a currency pair will
move in a similar direction, you can decide to open another position to
maximize your profit. If it moves in the opposite direction, you can hedge your
current position against market volatility.
Major currency pairs are the most popular and top traded currency
pairs. We can also get to identify a major currency pair by saying it is a pair
that involves the U.S. dollar (USD) and the currency of another developed
country with an outstanding economy such as EUR/USD, GBP/USD, AUD/USD, NZD/USD,
USD/JPY and USD/CHF. If you observed closely, these currency pairs listed
actually have the USD in all the pairings, it means that any currency pairing
without the USD is not major. AUD/USD,
NZD/USD,USD/CAD are considered major pairs, they can sometimes be found in the
group know as commodity pairs.
The major currency pairs
have the highest liquidity of transactions because of the high number of
traders who trade this set of currency pairs and which is why they account for
over 70% of the total turnover of the Forex market.
Currency Pair |
Currency Name |
Countries |
EUR/USD |
Euro/US Dollar |
Eurozone/United States |
GBP/USD |
British Pound
(Sterling)/US Dollar |
United Kingdom/United
States |
USD/JPY |
US Dollar/Japanese Yen |
United States/Japan |
USD/CHF |
US Dollar/Swiss Franc |
United
States/Switzerland |
USD/CAD |
US Dollar/Canadian
Dollar |
United States/Canada |
NZD/USD |
New Zealand Dollar/US
Dollar |
New Zealand/United
States |
AUD/USD |
Australian Dollar/US
Dollar |
Australia/United States |
Cross currency pairs are
pairs that are usually formed without the USD (US Dollar).They are second tier
currency pairs in trading activities. There are quite a number of traded
currency pairs in this category they include: EUR/GBP, AUD/JPY, AUD/NZD,
AUD/CAD, AUD/CHF, CHF/JPY, EUR/AUD, EUR/NZD, EUR/CHF, EUR/JPY, GBP/JPY etc. Please Note that there are more traded cross
currency pairs not listed.
As a trader you should
ensure not to use these popular cross-currency pairs in trading. It is also
advisable for new traders to steer off some cross currency pairs because they
are easily influenced such as the USD/JPY currency pair.These currencies are
also susceptible to various influences, therefore, beginner traders should
avoid them form their trading portfolio, as they require complex analysis and technical
forecasting experience.
Cross currency pairs do
not offer much liquidity as the major currency pair. It is okay to be curious
as to why any trader would want to trade the cross currency pairs and not the
major currency pairs instead, this is because some of the less popular
currencies are extremely liquid. But then the major currency pairs carry the
most liquidity and are the most popular compared to the crosses.
Currency Pair |
Currency Name |
Countries |
EUR/GBP |
Euro/British Pound
(Sterling) |
Eurozone/United Kingdom |
EUR/JPY |
Euro/Japanese Yen |
Eurozone/Japan |
EUR/AUD |
Euro/Australian Dollar |
Eurozone/Australia |
GBP/JPY |
British Pound
(Sterling)/Japanese Yen |
United Kingdom/Japan |
GBP/CAD |
British Pound
(Sterling)//Canadian Dollar |
United Kingdom/Canada |
CHF/JPY |
Swiss Franc/Japanese Yen |
Switzerland/Japan |
AUD/CHF |
Australian Dollar/Swiss Franc |
Australia/Switzerland |
CAD/CHF |
Canadian Dollar/Swiss
Franc |
Canada/Switzerland |
NZD/CHF |
New Zealand Dollar/Swiss
Franc |
New/Zealand/Switzerland |
The table above shows the
different types of cross currency pairs we have and of course we have more that
were not included in the table.
These currency pairs have
even lesser liquid than Crosses discussed above and are also the least traded
in the Forex market. These are the currency pairs that represent the
combination of currencies of countries less outstanding in terms of their
economy with the US Dollar and between each of them. These currency pairs have
low liquidity, high spread and risk and also high volatility which is why they
are less traded. These currency pairs include: USD/MXN, EUR/DDK, USD/RUB etc.
Forecasting of the trend for exotics is quite difficult and they are also
non-compliant to technical analysis which makes this currency pairs not so
profitable.
Most of those who trade on
exotic pairs are usually the members of those countries especially those who
believe their local currency has some volatility too. Before trading on your
local currency, it is important for you to have a grounded knowledge in your
country’s political and economic situation which will help guide your trade.
Your local currency is most likely to be traded against the US Dollars (USD) so
it is essential for you to have current information about the USD as well.
Currency |
Country/Currency |
AED |
UAE Dirham |
AFN |
Afghanistan Afghani |
MYR |
Malaysia Ringit |
GYD |
Guyanese Dollar |
AWG |
Aruban Florin |
IQD |
Iraqi Dinar |
BHD |
Bahraini Dinar |
SLL |
Sierra Leone Leone |
JOD |
Jordanian Dinar |
The table above does not cover all the exotics as there are several others. There are also a few things to consider before you decide to trade on this currencies and this include:
Having discussed above the
popular categories of currency pairs for a better understanding of currency
pairs, we would now focus on the main title of the topic which is discussing
the most profitable pairs to trade in Forex.
It is widely known that
the USD is the currency of the world’s largest economy and it is also the most
dominant reserve currency which is why a lot of people trade on it and that
makesit the most traded currency in the world. The EUR which is the European Union’s
currency is the next in dominance to the USD and this makes the pair the most
powerful when considering liquidity. This pair has a negative correlation with
USD/CHF but correlates positively with the GBP/USD.
This is the second most
profitable and popular pair to trade. This is a pair between the world’s giant
economies and it is popularly referred to as “the gopher”. The pair tends to be positively correlated with USD/CHF
currency pairs.
This pair is popularly
referred to as “the cable”. The
GBP/USD has a positive correlation with the EUR/USD as stated previously but a
negative correlation with the USD/CHF
This is a pairing of the
USD and its neighboring country’s currency the Canadian dollar. The pair is
popularly referred to as “the Loonie”.
This currency pair has a negative correlation to the EUR/USD, GBP/USD, AUD/USD
and this is due to the fact that the USD is the quote currency and not the base
currency in those set of currency pairs.
This currency pair often
called “the Aussie” tends to have a
negative correlation with the USD/CAD, USD/JPY and USD/CAD. This is because the
USD is the quote currency in this currency pair.
USD/CHF is often referred
to as the “swissie”. Forex traders
consider the franc to be a safe haven in times of political unrest. The Swiss
franc has a positive correlation with the British Pound and the Euro but it has
a negative correlation with the EUR/USD and GBP/USD currency pairs.
A
novice in swimming who visits a pool should know better not to swim from the
deeper part of the pool because he could drown. it’s best for him to start
swimming from the shallow part of the pool. This analogy applies to best currency
pairs to trade for beginners.
A
lot of beginners find themselves in a fix about selecting the best currency
pair due to their inexperience. When choosing a suitable currency pair as a
beginner you should pay attention to the predictability and volatility of the
pair among others. A pair being best for you also depends majorly on your
trading strategy. We would discuss the best currency pairs for beginners and
why these pairs are best for you as a beginner.
This
currency pair is the most popular pair in the Forex market. It is the most
traded currency pair all over the world. The best way to trade this pair as a
beginner is to make use of trend following strategies. This pair is more
beneficial to you as a beginner because it has high liquidity, low spread and
it is also easily predictable. Beginners who have studied the daily chart would
know that this pair usually trade in a range which makes the pair have a steady
nature.
·
GBP/USD
This
currency pair is one of the most traded currency pairs because of its high volatility.
It is more volatile than the EUR/USD. The currency pair instability of prices makes
it offer opportunity to make huge profit even though it is highly risky as
well. The term is good for beginners due to the fact that it is more
predictable when it comes to volatility. It is a pair more suitable for longer
trends.
Another
strong major currency pair to trade is the USD/JPY. This pair also accounts for
a considerable percentage of transactions in the forex market. It is also known
for its stable trends over long periods and this is why it is known as the
active pair. The pair is among the top three most volatile and most liquid
instruments in Forex and this determines low spread.
Australian
Dollar is strongly tied to Gold, Silver and other resources. These commodities
are what their economy rests on. The AUD/USD pair has plenty liquidity. This
pair is on of the best for beginners. It is suitable for technical analysis because
of its slow movement which makes it have a steady trend. As much as this pair
is recommended for beginners, it is advisable for beginners to focus attention
more on technical analysis. Study the steady trends by looking at the price
action.
Canada
is known to have the third largest oil reserve. This pair is more sensitive to
changes in oil prices. The pair is not so volatile but then the trends have
unpredictable movements which is why it is important for a beginner to consider
trends in oil prices.
This
pair in particular is less active than the rest of currency pairs stated above.
This pair is more dependent on economic conditions. The Swiss
franc acts as a safe haven when other economic value lose points. This pair can
be difficult for traders who use technical analysis. It also moves in the
opposite direction of the EUR/USD currency pair. For this pair to be profitable
for beginners, it is important for them to apply a swing trading method which
will make them profit from the pairs large swing in price action.
The most profitable
currency pairs are usually traded in the highest volume and this high volume in
turn brings about stability and greater liquidity in the Forex market. Having a the proper trading strategy, understanding how the market moves among other factors
is what usually help make a currency pair profitable for a trader. Most traders
often make the mistake of trading on a particular currency pair because they
see another trader making a profit out of trading on that particular currency
pair but if you do not put other things into factor like what we discussed
above you could end up watching your money go down the drain.