Understanding the Top Currency Pairs
The foreign exchange market is the largest and most popular financial market in the world, generating around $5 trillion in daily turnovers. It offers tremendous financial opportunities to the savvy trader, however before getting started it's essential to know as much as possible about this fascinating market, including the intricacies of the top currency pairs.
Currencies traded on the forex market generally fall into three categories: major, minor and exotic currencies. While the major currency pairs are the most popular and widely traded, the popularity of minor and exotic currency pairs is rising considerably and a growing number of forex brokers are expanding their currency trading options to keep up with demand.
The five major currencies that you should know about (and their corresponding symbols) are:
1. American Dollar (USD)
The American dollar, with its countless nicknames (including the greenback), is the home currency to one of the world's largest economies. Though it is widely influenced by the Central Bank and interest rate policy announcements, it is also supported by economic fundamentals such as GDP.
2. European Euro (EUR)
Also known as "the dollar's nemesis" this currency tends to be slower when compared with the British pound or Australian dollar, with an average base currency of between 30 and 40 pips.
3. British Pound (GBP)
Considered slightly more volatile than the euro, this currency tends to trade more widely during the day, with swings that can reach 100 – 150 pips. It is at its most volatile between London and U.S. sessions and at is slowest between Asian hours.
4. Japanese Yen (JPY)
This currency comes with low interest rates and can sometimes be very erratic. Its daily ranges are between 30 and 40 pips, but are known to hit as high as 150 pips.
5. Australian dollar (AUD)
Thanks to government policy, the Australian dollar or 'Aussie' features stable high interest rates, making it a favourite for carry trade. This currency offers reliability and a broad range of benefits.
Other important currencies include the Canadian dollar (CAD) and the Swiss franc (CHF) and the New Zealand dollar (NZD).
The above-mentioned currencies have the strongest economies in the world, and as a result these currencies are incredibly popular forex trading options as they possess a high level of liquidity.
During currency trading if you have opted to trade major currencies then these will generally fall into the following Forex currency pairs.
The four most common currency pairs are:
Other popular commodity pairs include:
The values of these major currencies continually fluctuate according to each other, as trade volumes between the two countries change on a minute-by-minute basis. These currency pairs are naturally associated with countries that financial power and a high volume of trade conducted worldwide. These pairs are also associated with high volatility, meaning that price fluctuations during the day can be highest.
When you first encounter the foreign exchange market the first thing you will need to decide is which currency pairs you are going to trade. And while there is no right or wrong answer when it comes to your selected currency pair and the majors are not necessarily the best, they do feature the best trading conditions as the spreads tend to be lower. That being said, no matter which currency pair you select, it's always necessary to trade with a successful trading strategy, proper strategy execution and trading discipline.
Analysing the top currency pairs:
One of the most widely traded currency pairs in the world is EUR/USD. This currency pair represents the two largest and most powerful economies in the world, and generates trillions of dollars a day in trades. As such, it offers immense liquidity levels, large price movements and the lowest spreads amongst modern-day forex brokers.
This currency pair is also favoured for its higher predictability thanks to the high transparency of both the EU and US economies. As such, price dynamics can be predicted using a range of technical analysis indicators. This pair is also sensitive to fundamental factors, as such it's also fairly straightforward to analyse this pair using fundamental analyses.
It is recommended to trade this currency pair between 1300 and 1600 GMT, as this is when the biggest moves of the day are experienced. This is also when both the New York and London markets are open, meaning greater volumes of trades being generated from two major markets, and as such, spreads are typically tightest during this time.
As with EUR/USD, the USD/JPY is a popular currency pair amongst novice and experienced traders alike, offering exceptional liquidity, relatively low bid/ask spreads, high levels of volatility and greater predictability. As the most liquid currency in Asia, it is often used as part of a carry trade strategy, whereby traders borrow yen at a low interest rate in order to fund investment in a higher-yielding currency, such as the dollar.
Trading the yen also means the availability of a wealth of resources, including direct access to bar charts, exchange rate history graphs and average daily ranges, as well as online forums, blogs and websites offering regular forecasts and market reviews. That being said, while volatility is a benefit, it can also lead to sudden price fluctuations, so remain vigilant while trading to avoid a winning position quickly turning into a costly loss.
The most ideal time to trade USD/JPY is between 1200 and 1500 GMT, because both the London and New York trading centres are open for the majority of this period. During this time the largest price moves of the day are experienced, meaning that profit potential is maximised.
GBP/USD is the ideal currency pair of choice for any trader as it comes with extremely high liquidity levels, narrow bid-ask spreads and an efficient trading environment. Both currencies represent two very strong and large economies, and as such there is countless information available on a moment-by-moment basis, as well as countless resources available for analysing them.
To be efficient and to capture the greatest market movements of the day, the best time to trade this pair is between 0600 and 1600 GMT, as there is plenty of volume during this time and therefore large market movements, low spreads and heightened profit potential. However, bear in mind the risks involved in trading GBP/USD. While this currency pair is most popular amongst professional traders with a focus on short-term aggressive strategies, it is wise for traders to exercise caution due to high volatility.
Cross Currency Pairs
Currency pairs that are not paired with the U.S. dollar are known as cross currency pairs. Some examples include:
- AUD/CAD – Australian dollar vs. the Canadian dollar
- EUR/AUD – Euro vs. the Australian dollar
Exotic Currency Pairs
Exotic currency pairs are fairly new to the trading platform and not all forex brokers offer exotics. They possess low liquidity levels, wider spreads and greater volatility, meaning that they are far more difficult to predict that major currency pairs – even with the deepest market analysis.
What's your preferred currency pair?
Major currency pairs offer more profitable trading opportunities than exotic currency pairs, so whether you are a first-time trader or possess more experience, it is probably wisest to avoid exotics. Instead, your primary trades should focus on major currency pairs, as these feature heavily in forex news announcements, they occupy the most foreign exchange transactions and are easier to analyse with technical analysis.
Regardless of which currency pair you select, the same principles will always apply including market volatility and the possibility of losing money. As such, you should only ever trade a currency pair that you know very well and are completely comfortable with trading. What one individual might find easy may be stressful for another, so try out different currency pairs on a demo account, and follow fundamental and technical analysis to see what works best for you.