What are the best pairs to trade? A Guide to the Most Traded Forex Pairs.
Each currency pair has its specific behavior and movement, as well as its nuances, which are recognized and understood by traders with sufficient experience in trading. In fact, by focusing on trading a couple of pairs you know well, it is possible to get a significant advantage in trading.
Beginners, once they open a terminal, either see nothing but EUR/USD, or trade all available pairs. We suggest that we take a short run through major currency pairs and note their characteristics. And at the end, you will find some handy tips on choosing the best forex pair.
What are the major currency pairs?
When talking about which currency is the best for trading, many experienced traders advise paying attention to the major currency pairs.
Major currency pairs are those consisting of the major, most liquid currencies, which are leaders in terms of the trading volume. So, what are the advantages of such pairs for trading?
The main advantage of these instruments is their high liquidity. On the one hand, it is advantageous in terms of spreads - these pairs have small spreads. That is why they can be easily and quickly sold with little or no loss of money. For trading styles, which imply active trading and plenty of positions during the day, small spreads are crucial.
On the other hand, high liquidity often means low volatility. This makes major pairs attractive to supporters of long-term trading. You do not have to worry that sharp price fluctuations will shake you out of the trade because sharp fluctuations are rare for these currency pairs. Of course, except for some crucial news and "black swans"
Above all, slippage is rare in positions with major currency pairs. And they will close faster.
Major currency pairs are easier to trade because one of the currencies is always a dollar. And it's easy to search for analytics and make predictions on it.
EUR/USD is the most popular currency pair for trading in the forex market, which is usually used by both novice traders and more professional players.
Since it is the most recognized currency pair among traders around the world, this implies that the greatest cash turnover in the market takes place on this very currency pair. EUR/USD greatly responds to important macroeconomic indicators, which are displayed in the event calendar.
The volatility of the EUR/USD currency pair is inferior to such sprinters as GBP/USD or USD/JPY, which can go through 200-300 pips a day. The average range that it covers in a day is 70-100 pips. Of course, if we consider that the trading day can be full of many important fundamental events, then EUR/USD may pass up to 200 pips, but this situation is very rare.
Active movement on the EUR/USD begins during the European and American trading sessions.
One of the main fundamental factors that have a great influence on the instrument Euro is the gross domestic product of the Eurozone, which includes: Netherlands, Germany, Spain, France, Italy, and others.
General monetary policy in the Eurozone countries is controlled by the European Central Bank, in turn, it regulates the change in interest rates, which is the second main factor in the change of the EUR/USD currency pair. The significant difference between the interest rates of the Eurozone and the U.S. from their balance sheet value leads to sharp fluctuations in one direction or another.
In addition to gross national product, it is necessary to pay attention to HICP and CPI inflation, unemployment, and industrial production. Important economic data from Germany should also be mentioned as this country has the strongest economy in the Eurozone and the release of such data often makes the EUR/USD currency pair "nervous" and this leads to its unexpected price fluctuations.
Another interesting factor of influence on the EUR/USD currency pair is the influence of cross-rates. For example, an essential news release from Switzerland, which led to a fall in the rate of EUR/CHF, could lead to a depreciation of the EUR/USD pair.
The USD/JPY, as the major Asian currency pair, accounts for over 18% of intraday transactions on the forex market and 25% of the turnover of the region's stock exchanges. The yen has a two-digit quote, rather than a 4 or 5-digit one, which is due to its low value relative to other currencies.
The main player here is the Bank of Japan, which has a specific organizational structure: the government owns a blocking 55% stake, and the remaining 45% is owned by large companies whose shares are traded on Asian stock exchanges.
That makes it possible to consider the interests of both sides: the government retains control over monetary policy, while corporations, most of which work for export, also have leverage over the national currency. Japan's export-oriented economy makes a significant strengthening of the exchange rate unprofitable and forces the Bank of Japan to adjust it through currency interventions.
USD/JPY belongs to the group of trendy currencies, with strong long-term movements, so any technical analysis tools can be used for the analysis. For medium and long-term trades, it is recommended to use strategies based on moving averages and trend channels, in intraday trading strong support or resistance levels and Fibonacci retracement work well.
Always remember that yen is, first, a fundamental pair and only then a technical one.
USD/JPY has no clear correlation with the major currencies, such as the euro or pound sterling. Of course, there is a correlation, but it is very difficult to use it to make clear position opening decisions.
During the day, the volatility of the pair is medium and usually does not exceed 40-50 pips, but at the moments of strong fundamental news, the pair reacts with sharp price movements of 100-200 pips with a series of following price corrections.
The pound dollar currency pair is quite common in the forex market. It is the third most popular currency pair. Its volume in the total turnover of currency pairs is about 12%. That's why knowledge of the specific behavior of this financial instrument and the most favorable periods becomes crucial for beginners.
The currency pair is considered one of the most aggressive. Pound, being rather heavyweight, provides cross-courses with its participation, and the GBP/USD pair, with strong volatility. Its behavior is quite unpredictable and notable for false breakdowns of support and resistance levels.
Its volatility during the session can be up to 130 pips. This pair is traded most frequently in the European and American sessions. As a rule, London trading sessions are more dynamic and active. The lowest liquidity for this pair is observed during the Asian session, on average, it is about 30 pips. Therefore, beginners should trade during this very time interval.
This financial instrument is more interesting for traders who focus on "fast" operations, i.e. scalping, as the high volatility of the pair allows them to place short-term orders during the day, targeting quick profits.
The GBP/USD currency pair is attracting lots of interest among traders, though many of them prefer the EUR/USD pair. As for its relationship with other currency pairs, they are rather vague. At first glance, it seems that the pair has a direct correlation to EUR/USD and a negative correlation to USD/CHF. In other words, GBP/USD moves in parallel with EUR/USD, duplicating the dynamics of its movement, and if the GBP/USD currency pair grows, we should expect a trend reversal of the opposite pair, i.e. USD/CHF, to the downtrend.
But this impression is usually deceptive: the direction of movements can differ quite sharply, especially when some GBP news is released. For example, traders should pay special attention to the news about the change in the interest rate by the Government of England.
USD/CHF currency pair can be attributed to the trend group, characterized by medium liquidity and high intraday volatility. It has a negative correlation with the EUR/USD, i.e. the price moves in the opposite direction with a slight lag. It allows using the EUR/USD chart as a leading indicator. During the release of important fundamental news and statistics on Europe and the United States can be observed a short-term violation of correlation, and for a certain period, both USD/CHF and EUR/USD can move in the same direction.
It is well amenable to the methods of technical analysis, and it is better to prefer traditional and proven tools, such as moving averages, trend channels, and indicators, support and resistance levels, as well as standard oscillators, like MACD or Stochastic. Remember that despite the sharp movements the pair's liquidity is low, so it is quite difficult to use "complicated" strategies such as VSA volume analysis. It is better to prefer trend-following and breakout strategies.
The intraday volatility of the currency pair USD/CHF fluctuates in the range of 60-100 pips. Nevertheless, we can observe a sharp increase to 150-180 pips during the release of fundamental news.
How to choose a major forex pair
Now you might be asking how to choose which major currency pair is better to trade. Well, there is no definite advice about which major currency pair is better to trade for any trader. There is no division of currency pairs into categories for beginners and professionals.
The choice of currency pair is in any case left to the trader's discretion and depends on many factors, including trading strategy, account balance, financial goals, and many others.
Trading the above-mentioned major currency pairs allows you to fully apply not only technical analysis but also the processing of signals on external information. But it is necessary to remember about their high volatility and a high percentage of speculative positions to consider these factors in your forecasts.
Keep in mind that while choosing the major currency pair to trade it is necessary to consider the following peculiarities:
- The volatility of the currency pair. The volatility means the range of fluctuations of the currency pair in a certain period, more often it is a daily fluctuation. Accordingly, some trading pairs are traded in a relatively narrow range, without sharp fluctuations, others - on the contrary. For example, GBP/USD is highly volatile, and trading in them is recommended only for those with an appropriate trading strategy designed for sharp and serious movements. Otherwise, you can quickly lose your deposit.
- The time of the highest activity. Each trading pair is the most active at certain times. For example, EUR/USD and GBP/USD are the most active during the European and American sessions and are inactive during the Asian session.
- Correlation of currency pairs. The movement of some currency pairs causes simultaneous or with a small time lag the movement of other pairs. There are so-called allied currencies when the movement of one currency pair causes the directional movement of others with a high degree of probability, and opposing currencies, i.e. some currency pairs move in line with each other, and some vice versa.
Why trade one currency pair
There are many different strategies for trading currency pairs, from fairly simple to incredibly complex. However, it will be better for beginners to concentrate on one of them and hone their trading skills rather than chasing the complexity and number of pairs traded. Become a professional expert in one asset, and then you will be more successful.
It is especially important for a beginner to understand the laws of the market, to learn how to find correlations and make forecasts, as well as to master the mechanics of placing orders. That is why it will be much better and effective for a beginner to settle on one major currency pair and trade it until the quantity of positions turns into the quality.
It is challenging to become an expert in the entire currency market. It will take many years of hard work, placing a huge number of orders, most of which will be losing for the sake of gaining the necessary experience and skills. However, in the case of one currency pair, the process becomes much easier.
It is much easier to trace in your mind the reactions of one currency pair to world events and its deviation levels, to find trading signals on the charts, and make probable forecasts.
Thus, it is much easier to achieve stable earnings by trading only one currency pair, rather than spending a lot of time and effort on their large number, some of which will bring losses due to the lack of human resources for their qualitative elaboration.
Currency pairs explained
A currency pair is the ratio of the value of one currency to the value of another. The first currency in a currency pair quotation is called a base currency, and the second - the quoted one. For example, AUD/JPY=0.0123 means that for one Japanese yen (JPY) you can buy 0.0123 Australian dollars (AUD), or, that is the same - for one Australian dollar you can get 81.23 Japanese yen (1/81.23=0.0123). In this case, the Australian dollar is the base currency, and the Japanese yen - quoted.
The order of the currencies making up a currency pair, as well as their codes (letters) are determined by the International Organization for Standardization (ISO).
The notion of a currency pair was born out of exchange operations formed in the forex market nowadays. The very essence of exchange operations presupposes the purchase of one currency for another; hence, it is more convenient to present quotations as the ratio of these two currencies, i.e. as a currency pair.
Buying AUD/JPY, you're simultaneously performing as many as two operations:
- You buy the Australian dollar (AUD);
- You sell the Japanese Yen (JPY).
Accordingly, when you sell AUD/JPY, everything is exactly the opposite:
- AUD is sold;
- JPY is bought.
Live rates for major forex pairs
You can check the live rates for major currency pairs with the help of one of the following sources:
- MetaTrader 4 trading platform. Just log in to the account, choose the currency pair of interest, and click on Chart Window;
- Go to investing.com, fxstreet.com, or any other website that provides this kind of information.
Be ready to see that values may differ slightly on all (or some) of the charts. It can be explained by the fact that companies have different liquidity providers. Moreover, another factor that may distort the data is the Internet connection.
What affects price movements?
Regardless of what trading strategy is used by a trader on the forex market, it is extremely important for successful trading to understand the principle behind the price movement of a particular major currency pair. The world currency system is based on certain rules which should help a trader to make optimal decisions under the existing conditions. The market experts determine the major factors, which can undoubtedly influence the currency rates:
- Central bank meetings. The results of central bank meetings always have a significant impact on major currency pairs fluctuations. As an example, meetings of the Federal Open Market Committee of the U.S. Federal Reserve System (Fed). The Fed's actions have a profound effect on the U.S. stock market and global financial markets in general since the U.S. is the largest economy in the world. Therefore, market participants are closely watching changes in interest rates and operations of the Federal Open Market Committee, as well as statements of representatives of the Fed, in particular, its current head Jerome Powell.
- Scheduled Fed meetings are held eight times a year (every six weeks). They consider the economic situation in the country, and on the basis of the analysis determine further monetary policy, adopt directives and determine the level of the Federal Funds Sales Rate and the value of the Discount Rate (analog of the refinancing rate). The final minutes of the FOMC meeting are published a few days later.
The basic principle of influence on exchange rates: an increase in the rate contributes to the growth of national currency (if we are talking about the Fed's rate - then the dollar) in the international market. Conversely, a decrease in the rate is likely to result in a decline in the national currency.
Speeches of heads of governments, chairmen of central banks. This is one of the factors that, in most cases, find an immediate response on the market. Quite often, especially under certain conditions, such speeches can not only greatly affect the behavior of currencies, but also fundamentally change the situation on the market.
Inflation, unemployment, and other macroeconomic indicators. All of these data are evaluated through the prism of whether the growth of one or another indicator will lead to an increase in the rate or vice versa.
For example, a central bank may resort to a rate hike to curb inflation, or conversely, a rate cut to stimulate economic growth when the number of unemployed is rising. And we have outlined above how the central bank rate affects the dynamics of the national currency.
Geopolitics and safe-haven assets. As the saying goes, money loves silence. When there is geopolitical tension in one region or another, the national currency of that country becomes cheaper. Investors choose the U.S. dollar and, traditionally, gold and other precious metals as a safe-haven currency.
Force majeure. Natural disasters and other force majeure circumstances also affect currency rates. For example, when two major hurricanes struck the United States in 2017, the EUR/USD exchange rate temporarily declined. The same thing happened to the Japanese yen against the U.S. dollar in 2011 when the Fukushima nuclear plant was hit by the tsunami in Japan.
Market makers. Basically, market makers are large banks and brokerage firms. They are the ones who directly create the current rate of this or that currency with the help of big volumes of billions and tens of billions of dollars, involved in the market. Due to such large volumes, they can move the market in a favorable direction by their actions (buying, selling).
- It is necessary to choose the currency for which you can receive timely information and competently process it.
- Try not to choose a currency pair, the required trading period of which (peak or decline) significantly differs from your free period. The combination of trading with another job or refusing to sleep will harm the trading quality, as well as the physical and psychological condition of the trader.
- At the beginning of a trader's career, it is highly recommended not to chase a quantity of currency pairs you trade. The best solution here is to choose one and learn to work with it. You can add other assets after some time when you get more experience.
- It is not recommended to change the traded pair permanently. The skills gained on one financial instrument with high probability might be useless on the other one, which can lead to unnecessary losses.
- The best choice would be to determine your intended trading strategy and, according to it, select the most appropriate major currency pair.
- You should not try to trade all instruments at once - dispersion of your mental abilities can lead to their deficiency in trading separately taken assets, which is fraught with loss of time, money, and nerves.