A Guide to Understand Profitable Currency pairs to Trade

Introduction

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.

What is Currency Trading?

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.

What are Currency Pairs?

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.

Currency Correlations

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:

• Positive correlation
• Negative Correlation

      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

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.

Cross Currency Pairs (Crosses)

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.

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.

Exotic Pairs (Exotics)

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.

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:

• Liquidity Concerns
• Limited Historical Data

•  Opportunity Cost
• Choppy Price Action

Most Traded Currency Pairs

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.

EUR/USD

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.

v     USD/JPY

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.

v  GBP/USD

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

v  USD/CAD

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.

v  AUD/USD

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.

v  USD/CHF

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.

Best currency pair to trade for Beginners

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.

·         EUR/USD

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.

·         USD/JPY

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.

·         AUD/USD

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.

·         USD/CAD

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.

·         USD/CHF

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.

CONCLUSION

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.