Newbie forex traders usually find it challenging to choose a suitable currency pair for their trade. Thanks to this guide, you will know the most popular currency pairs and learn what to consider when selecting them.
The forex market is the biggest and robust financial market that operates on a 24hr basis. Traders engage in buying and selling different currency pairs across the globe. In the trading space, the forex market has the highest liquidity.
There are approximately about 180 legal currencies worldwide, but only a tiny fraction representing the majority of the trading volume.
A key to making a significant return on your strategy is currency pairs, but what are they, and how do you use them?
Many newbies in forex trading stick to only a few less volatile pairs, while others would instead work on a single currency pair. But sometimes, working with a consolidated/volatile pair can prove more profitable.
Note: Currency volatility is the rapid and unpredictable change of exchange rates in the forex market. Volatility helps you to know the currencies to trade and how. It’s a measure of standard deviation. More volatility means more trading risk and more opportunity for traders because the price moves are more significant.
In This Guide
How to Choose a Currency Pair
Some Basics About Currency Trading
In the FX market, you trade currencies in pairs with different levels of volatility – some low, others high. Like in any other form of trading, the more volatile the pair, the higher the chances of making a profit or a loss.
Choosing a currency pair to trade is not a walk in the park. Thus you must adopt a perfect strategy that will help you meet both short and long-term financial goals. Again, the personality of the pair should be suitable for a specific trading strategy.
Liquidity – Primary Motive For Beginners
Liquidity in forex trading means the ability of a currency pair to be bought or sold without creating a significant impact on its exchange rate. Currency pairs with more considerable liquidity usually have low volatility, making them less risky than other pairs.
There are seven major currency pairs with high liquidity. This means that forex brokers often offer these major forex pairs at low spreads, which benefits traders through reduced trading costs.
A currency pair with large liquidity tends to have low volatility and thus less risky. Higher liquidity leads to lower spreads offered by brokers, thus bringing down trading costs.
EUR/USD has the lowest market spread with a period of moderate liquidity ranging from 0-0.7 points. Naturally, a novice trader would want to perceive such a perfect tool when choosing a tool for earnings. That’s why, unfortunately, over 80% of traders lose money in the long run.
Pay attention to trend pairs and work with what meets your expectations.
The most dominant and widely traded currency is the USD($). It’s the world’s reserve currency, and that’s because of the size and the sheer power of the U.S. economy.
A recent study in the OTC (over-the-counter) FX markets has revealed that the USD is still part of the 88% of all FX trades despite the currency’s declining status. In terms of popularity, the USD is closely followed by the Euro and Japanese Yen as the most traded currencies worldwide.
Choosing Pairs To Trade
For beginners, the best pairs are the less volatile. But highly volatile pairs offer a chance for you to make more enormous profits because of the dramatic price movements. So consider your tolerance to risk and the desire for liquidity before deciding the amount you want to invest.
Find out about the forex signal providers in the UK in our other complete guide.
Currency Pair Categories
The forex market has many currency pairs. These are divided into major, minor and exotic.
Major currency pairs are the ones with USD as part of the pair. They include the most traded currencies globally, namely the Euro, British Pound, Australian Dollar, Japanese Yen, Swiss Franc, and the Canadian Dollar.
Let’s dive a little deeper into each of the major seven currency pairs traded worldwide.
The market share of the Euro has been expanding since 2019 and now second to the U.S. dollar. When you combine it with the mighty dollar, the pair represents a stable option due to its low volatility. It’s also associated with the lowest spreads.
The USD/JPY pair shows how many Japanese Yens (the quote currency) you need to buy one U.S. dollar – the base currency. This pair is pretty sensitive to broad market sentiment and a safe-haven kind of a pair. For this pair, economic downturns and intense market volatility are followed by a rise in price.
Technically, The USD/JPY pair has been losing bullish strength during intense global economic times but is far from bearish.
Because the FX market is open 24 hours doesn’t mean that you can trade each of those hours. This pair has specific hours that are acceptable for day trading. But experienced traders are not just looking for ‘acceptable’ hours for trade. They want to trade the best hours of the day to try the best bang for their buck.
This pair tells you how many US dollars (the quote currency) is required to purchase the British pound (the base currency).
This was once considered a big pair and has been so volatile since the Brexit referendum of 2016. But that volatility has provided lots of swing trading opportunities. If you’re looking for a chance to make higher gains through pip movements, this is the currency pair to consider.
In this case, the AUD (Australian dollar) is considered the base currency while the US dollar is the quote currency – the denomination in which the price quote is given. The Australian dollar became a free-floating currency, and its popularity is due to its association with geography, geology, and government policy.
The pair is a rate-price quote where US dollars can be exchanged for Australian dollars. It’s among the world’s most traded currency pairs.
It’s a market cross-currency pair. During the Australian session, you can expect high volatility and liquidity. The USD/CHF pair quote is 1 USD per xCHF – which means you will need an X number of the Swiss franc to buy one USD.
The US dollar traded against the Canadian Dollar is also popular in currency trading. CAD is a commodity currency with its course correlating with oil prices, especially in the American session. This means that an increase in oil drags down the pair, whereas a decrease in oil pushes it up.
The New Zealand dollar paired against the US dollar shares many similarities with the AUD/USD. This currency pair is influenced by the price of commodities such as metals and powdered milk.
The major pairs make a whopping 75% of the entire forex trades, and they’re the most liquid/widely traded, thus the most profitable. Because the pairs have the largest volume of sellers and buyers, they have the tightest ask and bid spreads.
Other than the major currency pairs, there are also the minor and exotic pairs, as shown below.
Minor Currency Pairs: These are the pairs that leave out the US dollar and are typically less liquid.
Some examples of such pairs are EUR/CHF, CAD/JPY, or even GBP/AUD. When the majors are presenting less favorable opportunities, cross pairs are the best option.
Exotic Currency Pairs: These are the least traded pairs in the FX market and less liquid. Their prices can greatly fluctuate, and spreads can be wide due to the lower volume of trades. There’s also less historical data on the performance of the exotic pairs, therefore relying on technical analysis may not bear fruits.
Examples of exotic pairs include USD/HKD, JPY/NOK, and EUR/TRY.
Note: The major forex pairs can also be traded using CFDs and spread bets.
FX Pairs With The Most Pips
Pip is a unit of measure that defines the smallest value in change between two currencies. Most online forex providers quote not more than a fixed one-point spread between the bid and offer in an ordinary market condition.
In currency trading, you’ve to look for the pair with the highest pip values because they’re useful for short-term strategies. The value of every pip will also depend on the size of your lot and, of course, the currency you’re trading.
Pips are also valuable for calculating the leverage a trader can use when trading foreign currency. The pip value in a major forex pair will determine the profit or loss you make per trade.
How Do You Trade Currency?
Now that you have an understanding of how currency training works and the currency pairs to expect, below are the steps to follow to start trading currencies.
You can only trade what you are fully knowledgeable about to increase your profit potential. Therefore, above anything else, start by learning how to trade currencies. Many brokers have resources for learning forex, including demo accounts for testing and practising. You will also find resources like articles, videos, webinars, and more to boost your trading skills.
If you are a beginner, start by creating a demo account. It is free for users to learn trading currencies and familiarise themselves with a broker. Once you are confident with your skills, open a live account and deposit funds to start trading CFDs or spread betting on your chosen currency pair.
Learn more about best forex trading apps in the UK in our other guide.
- Choose a Currency Pair
There are over 300 currency pairs including, minor, major, and exotic crosses, that you can choose from. So, identify the currency pairs you are confident trading with and prepare to get started.
- Get a Trading Strategy
With not so many specific forex trading strategies to choose from, there are various trading methods to incorporate with currency trading strategies, including day trading, swing trading and more. Do you want to buy (go long) or sell (go short)? Your choice here will depend on your prediction on whether the price will rise or fall.
However, note that short trading has its challenges, making its trading strategies a bit different than long trading. Therefore, while short trading is not suitable for any trader, be very keen on your approach.
- Be Updated On The Forex Market
You should always have access to reliable news platforms which provide up-to-date information on the market performance on a 24-hour basis. Be keen on the breaking news and significant economic pronouncements such as inflation and change of interest rates.
Risk Management
Engaging in forex trading necessitates a firm grasp of its dynamic nature, which involves trading currency pairs and substantial market volatility, leading to potential gains as well as losses. Before entering the forex market, crafting a well-defined trading strategy and establishing a robust risk management plan to safeguard your investments is essential.
Moreover, exercising caution is imperative, as there is a risk of encountering forex broker scams and unregulated platforms. Since this market operates 24/7, always invest with what you can afford to lose. Plus, stay informed about market developments and continuously educate yourself to make well-informed trading decisions.
Remember that past performance does not indicate future results, and there are no guarantees of profit in forex trading.
Risk management is an essential part of training currencies since it helps you minimise losses if a trade goes against your strategy. There are various forms of risks in forex trading, including market risks, liquidity risks, leverage risks, and more. Having an extensive understanding helps you apply the proper controls in a trade.
There are various risk management tips in currency trading. Stop-loss and take-profit orders are among the popular ones in currency trading. Minimising losses can also be done by being fully knowledgeable about currency trading so that you can be able to weigh whether a specific strategy is worth risking for your trade.
We usually advise our readers, especially beginners, to not put themselves in vulnerable situations to losses by investing using a lot of funds. Start your currency venture slowly and invest with funds that you are willing to lose.
Additionally, stop obsessing over leverage trading since this strategy carries high risks of losing more than your investment. This is highly advisable if you have not done extensive research and are unsure about your trading strategy.
What Moves Currency Pairs?
A lot of factors like the strength of a currency pair determine the movement of the currency pair. Traders are always looking for the best exchange rate supplied by global banks and updated in seconds.
Commodities like oil and gold can also affect currency pair prices. The currencies are usually from countries with large quantities of commodities and other natural resources. The exchange rates of these countries are closely tied to their export and import activities.
Forex Currency Pairs Correlation
Currency pair correlation is the similarities shared by pairings. In the forex market, the currencies are interdependent. To manage your portfolio profitably, you need to understand forex correlation pairs and the relationship between currency pairs.
Consider if a currency pair is positively or negatively correlated. Are they likely to move in the same/opposite direction? You have to consider all that as you trade on currency pairs.
How To Trade Forex Beginning With One Pair
Whereas forex can be traded in a wide range of pairs, you can also opt on trading a single pair. Note that each currency pair is peculiar, and focusing on a single pair allows you to thoroughly study its behaviour, which gives you a massive advantage in your trade.
The first step to trading a single currency pair is understanding the currency pair you want to trade. Through fundamental analysis, you will be able to know how a currency pair’s price fluctuates and have a better understanding of the direction which a currency is heading.
The market liquidity and volatility of a currency pair is also worth considering when making your choice. Once you have identified your interests in the trading charts, you can now dip your feet into the single currency trading ocean and see how it turns out. Remember, consistency is key to becoming successful and independent.
Conclusion
The best type of forex pairs to trade will depend on the time of the day and your knowledge of currency. The pair you choose will also depend on whether you want to make smaller profits on a short-term basis or long-term gains.
Trading forex pairs allows you to make significant profits but requires a good strategy, regular research and patience.
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25,000 hours of testing 70+ brokers. Our recommended broker is Pepperstone.
Our recommended broker is Pepperstone.