The Best Forex Currency Pairs to Trade

When trading forex, it is important to be efficient in using your capital wisely. With only a few trading opportunities every day, you should make every position you have count. With this article, we’ll be going through the basics of forex and the best currency pairs to trade so that you can immediately jump in to trade the most volatile forex pairs with the right strategy.

Terms used when trading forex pairs

Forex pair’s base and quote currency

Tradeable forex currencies always come in pairs. The currency on the left is the base currency, also known as the transaction currency, while the one on the right is the quote currency, or sometimes known as the counter currency.

Major, minor, and exotic currency pairs

Once you’ve traded currencies, you will realize that some assets differ a lot in spreads compared to others. This is because of market participation and volatility. Thus, traders and investors have divided these currencies into three different classifications: the major, minor, and exotic currency pairs.

Major currency pairs consist of the world’s most traded currency pairs that include the USD since the USD is the world’s most used currency accounting for more than 80% of global trade value.

Minor pairs consist of the same currencies found in major pairs with the exception of USD. Lastly, the Exotic currency pairs are made of a major currency and a non-major one. Exotic pairs have high spreads and are the least traded of the three classifications.

Pip and Pipette

The pip is the standardized unit used in forex and is usually worth 0.0001 of the currency pair’s value. On the other hand, a pipette is the smallest unit used in forex and is worth 1/10 the value of a pip. For JPY pairs, the pip is located in the 2nd decimal place while the pipette is on the 3rd decimal point.

Lot size

Lot size determines the volume of an executed trade. A standard lot size is worth 100,000 units of currency. Nowadays, brokers offer mini, micro, and nano lot sizes, which are 10,000, 1,000, and 100 units, respectively.

Leverage

Leverage allows traders and investors to borrow capital from their broker at a small charge in return for a higher risk. One could take advantage of forex pairs’ minimal movement and gain bigger profits with a larger buying capital through leverage.

Volatility

Volatility is a measure of the intensity of the movement of assets in the investing world. This allows traders to profit from the market due to the price movement that happens because of supply and demand, which causes volatility. A more volatile issue would create more opportunities rather than a stagnant one.

Technical Analysis

Technical Analysis involves reacting and analyzing price fluctuations by using price action and charts. Someone using TA might use a few indicators or none at all, depending on their preference or their mastery of supports and resistances. Technical Analysis opens up a lot of ways to trade, such as momentum trading, trend following, or even scalping.

Fundamental Analysis

The other form of analysis when trading assets is called Fundamental Analysis. This deals with the future value of an asset when considering current and future monetary and economic policies. Through fundamental analysis, you will be able to analyze news articles and economic events to have an educated guess as to where the market might go in the next few hours, days, or even months.

Economic calendar

In forex, an economic calendar is your assistant to guide you through important financial events. Listed down in this calendar are future economic events such as FOMC meetings, monetary policy changes, or even speeches by important political and fiscal figures.

Bid and Ask price

When trading forex pairs, you will come across two kinds of prices on the same asset. These are the bid and ask prices. To buy the asset, you need to match the asking price, while sellers much match the bid price to be able to execute their order as soon as possible.

Market order

Traders can immediately enter their position by entering a market order which will immediately fill their order.

Bullish and Bearish

Generally, the terms bullish and bearish are used to describe uptrend or downtrend markets or assets. For forex pairs, a bullish pair means that the base currency appreciates in value more than the quote currency, while a bearish one means the opposite.

What are the factors that affect forex prices?

Economic events

Economic events are market-moving news or events that are scheduled and planned in advance by a government or its financial arm. A list of all incoming and past economic events is listed in an economic calendar, which is kept updated by brokers and third-party service providers.

Through economic events, traders may be able to speculate or prepare themselves for the possible effects this would have on the market as a whole or on the currencies affected. Thus, traders may choose to avoid or participate in the movement after the event, depending on their appetite for volatility.

Some economic events include central bank decisions, FOMC meetings, employment indicators, GDP, and many more. On the calendar, you would also see a consensus of analysts on their prediction of how the event would turn out, and you would be able to see the intensity this update would bring to the market.

Political movements

Aside from economic events, sometimes, politics come into play to cause volatility in the forex market. Countries that might wage war might encounter a decrease in demand for their currency. Alternatively, important issues such as the Brexit in 2016 would likewise cause waves for the GBP-using countries and the value of GBP, EUR, and USD. During market turmoil, for whatever reason, investors may opt to move their funds to safe-haven currencies such as CHF and JPY to avoid the downtrend of other currencies.

Sentiment

The sentiment is arguably the main reason as to why prices of any asset in any asset class move. Through the correct analysis of sentiment, one is able to know the correct direction of a trade even without knowing the underlying reason. Even though an economic event might seem bullish to a certain currency, sometimes the price does not react the way you expect it to and instead goes in the opposite direction.

This also affects supply and demand in more ways than one. It is also arguable that prices are currently the way they are because of sentiment, whether an asset is deemed overvalued or undervalued.

Market Participation

Market participation is one of the reasons why the forex market is the biggest exchange in the world. Retail traders, institutions, hedge fund managers, and many more are why we can buy and sell at certain prices. 

With high market participation, there is also high volatility and also lower spreads. Both are beneficial to traders before, during, and after a trade.

Market session

A market session is a period of time when a country’s market is formally open for trading. Even though the forex market operates on a 24/7 basis, there are more market participants when the banks and financial institutions are open. Thus, there is also more volatility during and when the market session begins and ends.

Sometimes, there is an overlap between market sessions depending on the seasons and the daylight savings time. This overlap causes more volatility and market participation than usual because of two major markets being open at the same time.

There are a few overlaps that happen in a year, and this would include the Syndey/Tokyo overlap and the more significant US/London overlap.

Inflation and deflation

Both inflation and deflation have direct impacts on the currency and the country as a whole. During inflation, the currency’s value decreases while the value increases during deflation. There are multiple factors that could affect both, but they generally include rises in production costs or in wages.

Interest rate

Interest rates are one of the major factors to take note of when dealing with forex simply because it directly affects the profitability of every trader. A change in interest rate made by the eight global central banks would definitely stir up volatility in the market. Not only can traders profit from the interest rate, but they could take advantage of the sudden change in price brought about by unforeseen monetary policies.

Commodity prices

Despite being an entirely different asset class, commodities directly impact a few important currencies such as NZD, CAD, and AUD. These three currencies make up part of commodity pairs simply because their country’s economies are heavily invested in commodities such as oil, iron, wood, and coal.

Best Forex Pairs to Trade

The best forex pairs to trade are usually the major or minor pairs, especially during market session overlap. However, there are six currency pairs that could consistently earn you profits after profits if you play your cards correctly.

These six pairs all have USD as either the base currency or quote currency simply because USD is the most important currency that the world is utilizing. Through trading USD, you get access to really good spreads because of market participation and volatility.

The first two we would like to mention are two of the three so-called commodity pairs, which include USD/CAD and AUD/USD. Our list does not include NZD/USD because the two other pairs have significantly better volatility and market participation.

As a commodity pair, Canada’s exchange rate is heavily dependent and correlated with the price of oil and other commodities due to exportation. One instance where this could be easily noticed was in 2016, when oil prices tanked and reached even beyond the 10-year low price. Another example is during the 2020 market crash caused by Covid-19, where the prices did the same thing.

Another thing to note with the USD/CAD, also known as the loonie, is that since the countries these currencies belong to are so close to each other and are each other’s important trading partners, they have one of the highest market participation in the world of forex. This makes USD/CAD a good candidate to trade due to both being affected by an external catalyst while having intrinsic volatility. To trade USD/CAD, it is best to be aware of the news regarding brent oil and crude oil, as well as updates on oil-producing countries.

AUD/USD is the next commodity pair that is important to take note of. The “Aussie” or the AUD/USD is the world’s sixth most traded currency pair for a good reason. Australia is one of the world’s top iron ore and coal exporters. Additionally, AUD is associated with CAD because of its partnerships and because of each country’s exportation capabilities.

Much like the CAD, the AUD is affected by commodity prices. If you intend on going long or short on any AUD currency pair, it is best to keep track of the prices of their main imports.

We would like to mention the next currency pair is the “Fiber” or the EUR/USD. This forex pair is one of the most traded assets in the world simply because of how significant these countries are due to their imports, exports, and GBP.

The EUR represents the Euro for the European Union, and despite not being adopted by every member of the EU, this currency is still being used by 19 out of the 28 countries. These countries include Spain, Austria, Belgium, Slovenia, Slovakia, Cyprus, Slovakia, Estonia, France, Portugal, the Netherlands, Finland, Greece, Germany, Malta, Ireland, Italy, Luxembourg, Latvia, and Lithuania.

The catalyst for the volatility of this pair usually changes in political and monetary policies. Specifically, when either currency’s country executes quantitative easing or other market activities that strengthen their currency.

The fourth currency is the “Cable” or the GBP/USD. The GBP stands for the Great British Pound and is used in the United Kingdom, South Georgia, South Sandwich Islands, British Antarctic Territory, Isle of Man, Jersey, Guernsey, Gibraltar, and Tristan da Cunha. The United Kingdom has opted to use the GBP rather than the Euro despite being part of the European Union until 2016.

The GBP is also the third most traded currency in forex, with the USD and the EUR in the first and second place, respectively. In the past 20 years, there have only been two market-moving events that significantly affected the GBP’s value.

The first of these events was the Great Recession that happened in 2007 and 2008, where investors sold their pounds for dollars at the rate of £1.40 per USD. Although prices rebounded since that point, another crash happened during the Brexit issue in 2016 when Britain chose to leave the European Union after 47 years. GBP dropped more than 20% since the decision due to investors choosing more stable currencies to trade and invest in.

USD/JPY is another currency pair that makes it to the list of the best currency pairs to trade. As the official currency of Japan, the Japanese Yen has been used since the late 19th century as a way to modernize their country. This currency has been fluctuating a lot through the years for reasons such as World War II and the 1973 oil crisis but has since then become valuable as a stable asset.

Investors and economists consider the Yen to be the fourth reserve currency because of Japanese economic policies. Due to their policies, the Yen was being actively stabilized and monitored for the benefit of the country and the global economy.

With how active the Japanese economic managers are, they try to manually control the Yen’s price relative to other currencies to keep daily price changes under control. Unlike most currencies, the Japanese Yen’s value is low, but this incentivizes a better and more competitive export market. Together with the CHF, which we will be talking about below, they are considered to be safe-haven currencies due to low volatility during market turmoil.

Lastly, we have the USD/CHF or the USD against the Swiss Franc. As the official currency of Switzerland, CHF is used by investors and hedge fund managers as a safe-haven asset in times of market volatility and uncertainty. Although Switzerland’s economic policies do not affect investors that much, their currency is usually unaffected as well by policies from other countries.

This creates a contrast in prices between pairs. If bearish news were to hit the US dollar, usually, CHF rises in value. Alternatively, CHF will lose some of its value for bullish dollar updates.

This observation was especially true during the Great Recession when the CHF resisted the downwards move and even appreciated in value. Other currencies, aside from the JPY, lost value during this time.

Choosing the right broker

When choosing a broker, it is best to choose one that is user-friendly and is focused on giving the client the best experience possible. We listed a few things to take note of when choosing a broker.

Minimal fees

In forex, even the smallest of fees can add up to big amounts, especially when using margin and leverage. Before depositing real funds, we recommend using a demo account to check out if your chosen broker offers minimal spreads on their offered forex pairs or if they charge a small amount for borrowing funds.

Simple deposit and withdrawal process

Your broker should also be able to process your monetary transactions as fast as possible for your convenience, whether you need it to trade or if you need to withdraw cash. At most, a deposit should only take a maximum of a day, while withdrawals should be processed within 3-5 working days.

Access to features

Brokers are now competitive in terms of features. While most offer demo accounts or live customer service right away, only a few could boast that they offer backtesting services or even free research materials for their clients.

FAQ

Which currency pair is most profitable in Forex?

There is no single pair that is considered to be the most profitable. This is because of the volatility or the lack of it that every pair experiences depending on market conditions.

However, there are pairs that stand out for being volatile while creating opportunities at least once a day. These are the major pairs which include EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, and AUD/USD. The currencies in these pairs experience high daily traded value and are used throughout the world in millions, if not billions, of transactions.

Even with just the six pairs mentioned above, you will be able to find profitable trading opportunities every day without having the need to look up and do research on either minor or exotic pairs.

Which currencies are the most traded?

According to the Bank of International Settlements, the top 5 currencies that are being traded are the USD, EUR, JPY, GBP, and AUD. The USD, being the world’s most used currency, takes up more than 85% of the world’s traded volume, while the AUD only participates in about 5% of the total volume in forex trades.

Which three currency pairs are the highest traded?

Since the top four currencies are USD, EUR, JPY, and GBP, the top three currency pairs in volume traded are EUR/USD, USD/JPY, and GBP/USD.

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