Forex trading is the exchange of one currency for another, usually with the aim of making a profit. Forex traders can choose from a variety of currency pairs, which are combinations of two currencies that are traded against each other.
But how do you decide which currency pairs to trade? And what factors should you consider when choosing them?
In this blog post, we will explore some of the most popular and widely traded currency pairs in the forex market, and give you some tips on how to choose the best ones for your trading style and goals.
The Major Currency Pairs
The major currency pairs are the four most heavily traded currency pairs in the forex market. They are:
- EUR/USD (euro and US dollar)
- USD/JPY (US dollar and Japanese yen)
- GBP/USD (British pound and US dollar)
- USD/CHF (US dollar and Swiss franc)
These four currency pairs account for more than 50% of the global forex market turnover, according to the Bank for International Settlements (BIS). They are also known as the “G10” currencies, as they belong to the 10 most influential economies in the world.
The major currency pairs have some advantages for forex traders, such as:
- High liquidity: Liquidity refers to how easily and quickly you can buy or sell a currency pair without affecting its price. High liquidity means that there are many buyers and sellers in the market, which results in narrow spreads (the difference between the bid and ask prices) and low transaction costs.
- Low volatility: Volatility refers to how much the price of a currency pair fluctuates over time. Low volatility means that the price movements are relatively stable and predictable, which reduces the risk of unexpected losses or gaps.
- Availability of information: The major currency pairs are influenced by many economic, political, and social factors that affect their respective countries and regions. These factors are widely reported and analyzed by various sources, such as news outlets, financial websites, and trading platforms. This makes it easier for traders to access and interpret relevant information and data that can help them make informed trading decisions.
However, the major currency pairs also have some disadvantages, such as:
- Competition: The major currency pairs are very popular among forex traders of all levels and styles, from beginners to professionals, from scalpers to swing traders. This means that there is a lot of competition in the market, which can make it harder to find profitable trading opportunities or gain an edge over other traders.
- Correlation: Correlation refers to how closely the price movements of two or more currency pairs are related. Some of the major currency pairs tend to move in the same direction or opposite direction most of the time, which can affect your risk exposure and diversification. For example, EUR/USD and GBP/USD are positively correlated, meaning that they tend to rise or fall together, while USD/JPY and USD/CHF are negatively correlated, meaning that they tend to move in opposite directions.
The Commodity Currency Pairs
The commodity currency pairs are three currency pairs that are closely linked to the prices of certain commodities, such as oil, gold, or agricultural products. They are:
- USD/CAD (US dollar and Canadian dollar)
- AUD/USD (Australian dollar and US dollar)
- NZD/USD (New Zealand dollar and US dollar)
These three currency pairs are also known as the “commodity dollars” or “comdolls”, as they represent countries that are rich in natural resources and depend on commodity exports for their economic growth.
The commodity currency pairs have some advantages for forex traders, such as:
- High volatility: The commodity currency pairs tend to have higher volatility than the major currency pairs, especially during times of geopolitical tensions, natural disasters, or supply and demand shocks. High volatility means that there are larger price movements and fluctuations, which can create more trading opportunities and higher potential returns.
- Diversification: The commodity currency pairs offer a way to diversify your portfolio and reduce your risk exposure to the major currency pairs. The commodity currency pairs tend to have low or negative correlation with the major currency pairs, meaning that they often move independently or in opposite directions. This can help you balance your risk-reward ratio and hedge against adverse market conditions.
However, the commodity currency pairs also have some disadvantages, such as:
- Low liquidity: The commodity currency pairs have lower liquidity than the major currency pairs, especially during off-peak hours or periods of low market activity. Low liquidity means that there are fewer buyers and sellers in the market, which results in wider spreads and higher transaction costs.
- Sensitivity to external factors: The commodity currency pairs are highly sensitive to the changes in the prices of their related commodities, as well as the global economic and political events that affect the demand and supply of those commodities. These factors can be unpredictable and volatile, which can increase the risk of sudden price spikes or drops.
How to Choose the Best Currency Pairs for Forex Trading
There is no definitive answer to which currency pairs are the best for forex trading, as different currency pairs may suit different trading styles, goals, and preferences. However, here are some general tips on how to choose the best currency pairs for your trading:
- Know your trading style: Your trading style refers to how you approach the forex market, such as how often you trade, how long you hold your positions, how much risk you are willing to take, and what kind of returns you are aiming for. Depending on your trading style, you may prefer currency pairs that have high or low liquidity, volatility, or correlation.
- Know your trading strategy: Your trading strategy refers to the specific rules and methods that you use to enter and exit the market, such as what indicators, signals, or patterns you follow, what time frames you use, and what risk management techniques you apply. Depending on your trading strategy, you may prefer currency pairs that have certain technical or fundamental characteristics, such as trends, ranges, breakouts, or reversals.
- Know your trading schedule: Your trading schedule refers to when you are available and willing to trade, such as what days of the week, what hours of the day, or what sessions of the market. Depending on your trading schedule, you may prefer currency pairs that have more or less activity, movement, or opportunity during those times.
The bottom line is that you should choose the currency pairs that match your trading personality and preferences, and that you are comfortable and confident with. You should also test and evaluate your chosen currency pairs on a demo account before trading them on a live account, to ensure that they perform well and meet your expectations.