Foreign exchange (forex) trading involves the selling and buying of currencies in pairs. To start buying and selling currencies, you will have to gather information relating to the worth of each currency pair you choose – the relationship defines each currency pair. Each currency pair will quote two different abbreviations along with the base value of the currency, depending on the currency counter.
The forex trade involves international codes that specify the currency pairs’ setup. A quick example, EURUSD 1.23 quote should tell you that one Euro is equivalent to $1.23. In this case, the Euro (EUR) is the base currency and the USD is the counter currency. Therefore, the global currency markets list each currency pair. When trading, you have to keep in mind that the major currencies are not necessarily the best pairs to trade. However, they are pairs with higher liquidity and occupy the largest number of transactions. They include:
USD/JPY (US dollar – Japanese Yen)
EUR/USD (Euro-US Dollar)
GBP/USD (British Pound – US Dollar)
AUD/USD (Australian Dollar – US Dollar)
USD/CHF (US Dollar – Swiss Franc)
USD/CAD (US Dollar – Canadian Dollar)
Values of the major currencies are always fluctuating according to one another because the trade volumes change between the involved countries after every minute. People naturally associate them with the countries that have great financial power and countries with a higher volume of trade. The pairs are more volatile, which means that the fluctuation in price that happens during the day can be large than that happening at night.
The currency pairs are not necessarily the best. You can end up losing or making more money out of the fluctuations. The above pairs have better trading conditions the spread is usually lower, but they are not the best to go for. So, which are the best currency pairs to go for?
The best currency pairs to trade
With more than 200 countries, you will always find several currency pairs to use in your trading. However, not every currency pair will have the potential of delivering the desired results. The most popular currencies in Forex trading include the US Dollar (USD), the EURO (EUR), Australian Dollar (AUD), Swiss Franc (CHF), Canadian Dollar (CAD), Japanese Yen (JPY) and the British Pound (GBP).
Out of the currencies, you can easily find several popular currency pairs. To be successful in Forex trading, you will have to understand each currency pair you intend to trade. By selecting one of the following pairs, your trading will be simpler because experts are always offering advice. In other words, you will need to do minimal research.
The Euro is a stable currency representing the European Union and it is currently the official currency of 19 member countries – out of 28 members. Some of the countries that use this currency are France, Spain, Latvia, Finland and some countries in Western Europe. You just need to monitor the political movements that might affect the USD/EUR in relation to each other. For example, if the European Central Bank interferes with the market to strengthen the Euro, the cross of USD to EUR might decline.
The USD/JPY is among the most popular currency pairs and you are likely to encounter it more times than any other in your trading career. People associate it with lower spreads and you will manage to follow smooth trends in comparison with the other currency pairs. It has the opportunity of delivering many profitable opportunities for traders.
Possible large jumps and profitable pips have highly contributed to the popularity of the GBP/USD pair. However, you should keep in mind that high profits will also come with greater risks. The currency pair falls in the category of volatile currencies and most traders are now going for it because the internet offers more market analysis information.
People see the Swiss Franc (CHF) as a safe-haven currency. In other words, during times of volatility, the currency will appreciate while others lose their value. During the Great Recession, the CHF appreciated rapidly against the other currencies apart from the JPY. Therefore, CHF and JPY are among the highly traded safe-haven currencies today, thanks to their low volatility.
The Australian Dollar (AUD) is one of the commonly traded currency pairs. Its value is closer to that of the CAD, thanks to the relationships of economies the two currencies share. AUD is correlated to with the world’s commodity market intrinsically because Australia has remained the leading exporter of iron ore and coal in the world. if you are interested in holding AUD, you will have to monitor the Australian economy closely.
All the currency pairs in the current market have tight spreads. However, the fact does not apply to the GBP/USD currency due to the volatility. Avoid currency pairs with higher spreads. Experts recommend a spread of 0-3 pips. A currency pair with a spread exceeding 6 pips will be very expensive and can result in great losses.