Name a market that never closes, has the largest volume of the world’s business with people from all countries in the world. Yes, you got it right. It is the foreign exchange market.
The market has ascended from the need for a system to ease the exchange of different currencies around the world. It is the best financial market in the world which reflects the financial dynamics of world trade quite clearly. All the trades in Forex are a trade-off between the pairs of currencies from two different countries.
The famous phrase money never sleeps – coined by the well-known Hollywood movie Wall Street – summarizes the foreign currency exchange market. No matter what time of day, the Forex market will stay open and close to facilitate continuous trading.
When you begin to trade Forex, you may get speechless and confused by the sheer number of available currency pairs. What are the best currency pairs to trade? The answer isn’t so straightforward as it varies with each trader.
This article will briefly describe what currency pairs are and show the best currency pairs to trade.
What are currency pairs?
Forex trading – or foreign exchange trading – basically refers to buying and selling currencies in pairs. For the buying and selling of currencies, you need to fill yourself in on how much the currencies in the pair are worth in terms of the other.
This relationship is what defines a currency pair. A currency pair quotes two currency abbreviations followed by the value of the base currency based on the currency counter.
There is an international code that specifies the setup of currency pairs. For example, a quote of EUR/USD 1.23 means that one Euro is worth $1.23. Here, the base currency is the Euro (EUR), and the counter currency is the US dollar. Thus, each currency pair is listed in currency markets worldwide.
Are the major ones really the best ones?
Obviously, the most dominant and strongest currency, as well as the most extensively traded, is the US dollar. The reason for this is the scope or the size of the US economy, which is the world’s largest.
The US dollar is the preferred reference in most currency exchange transactions worldwide. It is the dominant reserve currency of the world. The following are not necessarily the best Forex pairs to trade, but they are the ones that have high liquidity and occupy the most foreign exchange transactions:
- EUR/USD (Euro – US dollar)
- USD/JPY (US dollar – Japanese yen)
- GBP/USD (British pound – US dollar)
- AUD/USD (Australian dollar – US dollar)
- USD/CAD (US dollar – Canadian dollar)
The values of these currencies keep changing according to each other as trade volumes between two countries change every minute. These pairs pertain to countries that have financial power, and the countries with a high volume of trade conducted worldwide.
Generally, such pairs are the most volatile ones, meaning that the price fluctuations during the day can be the largest. Does this mean that they are the best? Not necessarily, as traders can either lose or make money on the fluctuations.
Nevertheless, the pairs mentioned above do have the best trading conditions as the spreads tend to be lower. But it doesn’t mean that the majors are the best Forex trading pairs.
See Also: Different Methods of Forex Trading
The Best Currency Pairs to Trade
With over 200 countries in the world, you can find some currency pairs to engage in trading. However, all these currency pairs do not have the potential to deliver the best results to traders. What is the best currency pair to trade?
Many trading strategies have been developed and tweaked with the EUR/USD pair specifically in mind. Certainly, the Euro and the Dollar are the two largest currencies in the world. Thus, it has very high liquidity as well as stability. EUR/USD is a popular currency pair that it has a very low bid/ask spreads and there are always available units for even massive trades.
Moreover, the trading market is very unlikely to shift or influence the currency pair. With that, it becomes easier to create analyses and strategies that will help the trader.
EUR/USD is often suggested as the starting place for a trader who is just starting out. As with many USD trades, this trade can be hedged by other trades such as USD/JPY and USD/CAD. Thus, it’s usually not a good idea to begin too many trades with USD in the pair at once.
This is a common beginner’s mistake that can take them out if the USD price suddenly rises or falls. The dollar is the most traded currency in the world. Although it would apparently create stability, other currencies do range significantly in relation to their value to the dollar.
USD/JPY is extremely liquid as the two countries create a good pair or those seeking profits. Often called the Gopher, it is the second most commonly traded pair on the foreign exchange market. USD/JPY is one of the best trading tools for beginners that either want to commit faster or learn about volatility. However, it’s not advisable to sink a lot of money into USD/JPY until you’ve gotten a feel for its swings and behavior.
USD/JPY is one of the currency trades that is most often impacted by political issues. JPY tends to swing up or down fairly sharply in comparison to the relatively stable USD. Consequently, the patterns that JPY creates are fairly predictable. Based on both time and season, so many traders can make quite a lot by learning more about its temperament.
The Japanese currency (Yen) is highly dependent on many global factors, such as the import of oil. Thus, an experienced trader will often be able to strategize regarding the market and commodity prices. Japan is also often uniquely hit by natural disasters and political issues. At these times, careful traders may need to get out of the market, as the currency can become quite volatile.
Also, the yen tends to be either boosted or dragged down relative to the rest of Asia. For instance, China and Korea may both have a substantial impact on the trading activity and volatility of JPY. This is because JPY is often seen as a doorway to the east. Those who do trade USD/JPY may want to keep current on Japan’s political and financial issues directly.
GBP/USD trades on one of the largest markets in the world, the British pound. This pair tends to be fairly predictable. Many forex traders use support and resistance level trading to better understand the market with this currency pair.
In fact, the GBP/USD trading pair is one of the oldest in the world. It’s often referred to by the nickname “The Cable”, pertaining to the older technologies that used to carry the day’s trading rates. GBP/USD is one of the best beginning currency pairs because it is so liquid and backed by such stable economies.
GBP/USD maintains an interesting relationship with EUR/USD. Specifically, it tends to mirror it. The Euro and the British pound both perform virtually identically. Therefore, traders may either want to use GBP/USD to hedge EUR/USD or may not want to involve themselves with trading both currency pairs at all.
Trading GBP/USD and EUR/USD in the same direction will often be fruitless. They will almost always operate in tandem without any specific advantage to either. GBP/USD can still be a very interesting trading pair. It is best left to experienced investors, though when looking to trade both the GBP/USD and EUR/USD instantaneously.
The United States dollar and the Canadian dollar make an interesting pair.
Both tend to fluctuate extremely based on commodities, but they tend to do it together, because similar commodities are traded. However, there are notable exceptions; for instance, the United States oil industry has caused a divergence between USD value and CAD value. That depends on where the oil market is within the United States at any given time. Thus, there are many differences in trading and commodities that a skilled and strategic trader can play on.
Nevertheless, USD/CAD remains a good pair for the beginner because it is generally very stable.
Due to the close geographical proximity of the USD and CAD markets, the currencies don’t tend to diverge often. But they still do which creates opportunities for profit. As a relatively strong economy, the Canadian Dollar tends to be primarily influenced by political events. Thus, a trader getting into USD/CAD may want to educate themselves regarding any issues that could potentially arise.
AUD/USD or the Aussie, has sporadically become the third most popular currency. This can be surprising to many who expect that JPY, CAD, EUR, and GBP would all outrank it. But in fact, the Australian dollar is extremely attractive for both beginning and advanced investors.
Australia’s economy has been doing very well and that has driven a significant amount of growth within the country. The currency has reflected this by making marked and predictable gains against many other currencies, though there are also some significant shortfalls and financial collapses.
Essentially, there are many trading strategies that can be used and tested out on AUD/USD, as it often shows long periods of stable growth in addition to periodic collapses.
AUD/USD is probably a little more challenging than the other currency pairs in this list. But it does have a very unique benefit, its volatility. Thus, those who are interested will need to keep abreast of Australia’s current economic conditions, as when there is a low, it is usually a very dramatic one.
The subtleties of foreign exchange trading are an intriguing subject to study. Because it can provide a boost to the world economy, along with the rise and fall of its financial fortunes. As globalization becomes a big issue for most countries around the world, the fate of these pairs is closely interconnected. Make sure you study the foreign exchange market before making an investment.
There are many Forex pairs available for trading and it is best to try trading most of them before choosing. As Forex trading is risky, try it first on a demo account with a virtual balance. Identifying the best currency pair to trade is difficult and the best way to accomplish this is through hands-on experience.
See Also: Forex Trading Strategies
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