The allure of forex trading has been escalating rapidly in the past few years, and it’s really no wonder why. It not only offers traders fantastic opportunities to dip their toes into the vast forex market but also welcomes them to the world of leveraged trading with considerably lesser margin prerequisites than what’s demanded in equity markets. Brimming with nearly $7.5 trillion worth of transactions daily, the forex market stands tall as the most enormous and fluid market across the globe – an absolute dream for traders hankering for high leverage trading. But remember, before you take a headlong dive into this swift and invigorating world of forex, it’s critical to get acquainted with the “crème de la crème” – the best currency pairs to trade. That’s where this article comes in handy. We will traverse through the top dogs of forex currency pairs, equipping you with key insights to elevate your trading performance.
What Are Currency Pairs?
Whenever we discuss forex trading, it’s essential to grasp the concept of “currency pairs,” which forms the backbone of this sector. Essentially, a currency pair is a juxtaposition of two nations’ currencies, representing the exchange rate between them.
To spill the beans, each currency has a particular value. When these values interact, they give rise to the value of the pair, a concept as fascinating as it sounds. It’s not just about the interplay of values – the interests of traders also swing the balance.
Now you’d ask, why are currencies always traded in pairs? Well, consider this – when off on a foreign trip, you automatically deal in two currencies – you spend in your home dollars and buy the local currency. The same applies to forex trading. When you buy or sell one currency, you inadvertently sell or buy another, framing a classic ‘currency pair’.
Intriguingly, each currency pair is bifurcated into a base currency and a quote currency. The base currency, the first currency to grace the pair, calls the shots. It defines how much of the quote currency, (second in line), is needed to buy one unit of itself. For instance, let’s take the most popular EUR/USD pair. Here, EUR plays the role of the base currency, while USD slides into the role of the quote currency. If the pair is set at 1.2000, it implies that 1.20 U.S. dollars will fetch you a single euro.
Currency pairs don’t all march to the same drum, i.e., there’s a distinction in how commonly they are traded. Some currency pairs like the US dollar, Euro, or the Japanese yen, termed ‘major’ currency pairs, are high-flyers in terms of liquidity and possess relatively stable volatility. Then there are ‘minor’ and ‘exotic’ pairs that walk on the wild side, marked by lower liquidity, wider spreads, and higher volatility.
Many factors sway the exchange rates between currencies, such as economic indicators, central bank policies, global events, and the pulse of the markets. As a trader, getting on a first-name basis with these elements can give you a ringside view of price trends. However, some traders, in their unique style, prefer chart-reading as their oracle to make astute trading decisions. After all, isn’t that the beauty of trading – where myriad strategies converge into a single marketplace?
So, whether you’re a rookie, a pro in the making, or a seasoned trader, understanding the dynamics of currency pairs could be your first leap into the enthralling world of forex trading.
Types Of Forex Pairs
In the bustling world of forex trading, currency pairings emerge as the stars of the show. These pairings can be categorized into three thrilling groups: Majors, Minors, and Crosses. Isn’t the diversity fascinating?
Majors. If the forex market was a popularity contest, Majors would certainly be the crowd favorites. The US dollar steals the limelight in this category, always playing a pivotal role. And why wouldn’t they be popular? With the highest liquidity among its peers, Majors cater to traders by offering optimum trading opportunities. But, there’s always a catch, right? Their easy accessibility and a wealth of research data make this market an intense battlefield buzzing with competition.
Minors. These pairs are like the intriguing mavericks of the financial world. Speaking their charm, they shun the US dollar but always rope in another heavy-weight currency, for instance, the Euro. Comparatively less liquid than their Major counterparts, Minors are a bit more elusive, with less data up for grabs. But hey, isn’t that where the opportunity lies? Their relatively less competitive landscape could play into the hands of tactful traders looking for a distinctive edge.
Crosses. These are the striking sorts that don’t have the US dollar in the mix. But wait, don’t confuse this with the Minors. While Minors involve a major non-US dollar currency, Crosses could involve any non-US dollar pairing. So, a Minor, intriguingly, is a specialized type of Cross.
The Best Forex Pairs To Trade
The Euro-Dollar or ‘fibre’ is often recognized as the most sought-after forex pair. It offers the best trading volume and usually has the narrowest spreads. This forex pair reflects the economic activities of two significant global economies–the United States and the Eurozone – and is widely popular among forex traders.
Market activities including political maneuvers that impact the dollar and Euro, and multilateral relationships, play a significant role in the EURO-DOLLAR pair trends. For instance, a move by the Federal Reserve to bolster the dollar value will likely cause a spike against Euro, subsequently lowering the value of this currency pair.
Forex newbies frequently opt for the EURO-DOLLAR, given the abundance of information about the pair available on the internet.
The DOLLAR-YEN is popular for its lower spreads and relatively predictable price movements compared to other pairs. Despite the Yen’s volatile daily price changes, the Japanese central bank’s frequent purchases and sales of its currency has helped maintain stable exchange rates, fostering a resilient export market.
Known to be under a ‘dirty float’ regime–meaning its value fluctuates but with some level of control – trading the DOLLAR-YEN offers regular and safe capital gains if the trades are timed right.
DOLLAR-YEN, popularly called the ‘gopher,’ has become a favorite for traders looking to capitalize on the shifting dynamics between the United States and Asian regions, especially with the rise in competitive sectors like technology and e-commerce.
The POUND-DOLLAR or the ‘cable’ has been a favorite among traders. The rise in traders looking to speculate on the UK’s economy follows a series of economic and political events, including the 2008 financial crisis and the Brexit decision.
Amid rising currency fluctuations, traders turned their focus in September 2022 to the POUND-DOLLAR as the UK government and its central bank grappled with soaring inflation, pushing the pound to its lowest since 1985.
Despite being a volatile forex pair, the huge price swings have increased the POUND-DOLLAR’s popularity. However, traders are advised to use stops and limits to manage risks due to its high volatility.
This pair consists of the US Dollar and the Chinese Renminbi or Yuan. It indicates the exchange rate between the two major economies and largest exporters.
Historically, the Yuan had a lower value compared to the dollar because of the Chinese government’s market manipulations to make its exports competitively priced.
The key determinant of the DOLLAR-YUAN pair in recent years is the US-China relations, which had notably soured in August 2022 when US House Speaker Nancy Pelosi visited Taiwan, triggering China to suspend its climate talks with the US and sever high-level military communication links.
The Chinese Renminbi is usually symbolized as CNY in the forex market, while it’s symbolized as CNH for offshore trades. CNH is usually more volatile, as it is not as tightly controlled as CNY by the Chinese government.
The US dollar and the Canadian dollar share a robust correlation as neighbors and significant trading partners.
The Canadian dollar, heavily dependent on commodity prices particularly oil, is an important part of Canada’s export-driven economy. Hence, one should keep tabs on oil prices to determine an optimal time to exchange USD for CAD.
It’s crucial to note that the Canadian dollar strengthens against the US dollar when oil prices rise due to the vast amounts of US dollars being converted to buy oil and Canada earning US dollars from exporting its oil.
The AUSSIE-DOLLAR, constituting 5.4% of daily forex trades, is favored by traders who want exposure to the commodities markets without trading futures contracts directly.
This is because Australia being a leading exporter of coal and iron ore worldwide, the Australian dollar value is largely tied to commodity prices. A drop in commodity prices could shrink the economy and lower the Australian dollar value, causing the price of the AUSSIE-DOLLAR to fall.
Traders interested in holding the Australian dollar should monitor the price of commodities vital to the Australian economy and announcements from the Reserve Bank of Australia or Federal Reserve carefully.
What Should I Buy Today?
“Which forex pair should I trade today?” It’s a question that keeps nipping at the shoes of every forex beginner. But don’t worry. You’re not alone in this pursuit, and that’s what we’re here to unpack together.
Forex trading, as you already know, invites a multiple of currency pairs – much like a grand international buffet with dishes from various nations. However, as a newcomer, you don’t have to taste all the dishes at once. Adhering to this principle will keep your trading plate balanced as well as palatable.
So, where do you start? The recommendation for most beginners would be to focus on the ‘Major Currency Pairs’. These pairs commonly include EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, and NZD/USD. These “big seven” are considered the major league players in the forex market partly because of their high liquidity and the wealth of economic data supporting them.
“But why these pairs?” you might ask. Simply put, their popularity and high liquidity equal lower spreads, which equates to lesser trading costs for you. Plus, their richly supplied economic data boosts predictability, allowing you to, in a manner of speaking, ‘read the room’ better.
Imagine if you were trying to predict the outcome of a basketball game. Wouldn’t it be easier if you had data on the players’ past performance, strategies, and statistical likelihoods? That’s what trading major currency pairs is like for a beginner—it’s simply an easier game to anticipate.
Yet, remember that “simple” does not always mean “easy”. It’s always necessary to understand and analyze the market dynamics for each currency pair. Like any trade, forex trading involves its share of risks. However, by starting with major currency pairs, you’re giving yourself a firm footing in the constantly shifting sands of the forex market.
So, as you enter the vibrant world of forex trading, keep it simple at first. Stick with the “majors,” educate yourself, and always keep an eye on the ebb and flow of market trends to safeguard your investments.
There’s no universally ‘best’ pair to trade, but there’s always a ‘best’ pair for you, based on your understanding, resources, market research, and risk-appetite. Know it, trade it, and let your forex journey evolve—just the way you would like it.