The choice of the best Forex currency pairs to trade is not a walkover, as it might seem at first glance. The main factors to consider when choosing the best currency to trade include volatility, spread, trading strategy and the level of difficulty of forecasting the course.
There is a huge variety of currency pairs available for trading in the Forex market. Most often, ignoring the other instruments, traders open positions on all known EUR/USD and GBP/USD, which are the most traded currency pairs in the world. Apart from them, there is a large number of other popular currencies. So what currency pairs are the best currencies to trade in Forex, what tools are to be excluded from your portfolio?
Let’s start with the fact that depending on the fundamental characteristics, currency pairs are divided into 3 groups:
Major currency pairs (Majors)
Major currency pairs (Majors) or top traded currency pairs, i.e. pairs that include the U.S. dollar and the currency of one of the most significant and economically developed countries (groups of countries): EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CHF, USD/CAD (together they account for more than 70% of the total turnover of the Forex market). The top currency pairs are characterized with the highest liquidity of transactions, global popularity and a huge number of players.
If pairs were handed an Oscar, then EUR/USD which is most traded currency in the world would have won at least three nominations and would have taken home the award for “highest trading volumes”, “worldwide popularity” and “the lowest spread”.
By the way, the prize of spectator sympathies, no doubt, would also have been accrued to it. Euro/dollar (EUR/USD) is the most liquid pair in Forex. It accounts for over one-third of the total volume of transactions on Forex. This is due to various factors, the main of which are the scale and transparency of EU economies and the US.
Trading EUR/USD, the trader receives a range of benefits, which include:
High liquidity of the instrument, which determines the favorable conditions of conclusion of transactions. In addition, due to the liquidity, Euro/dollar pair is one of the most predictable currency pairs of Forex – price dynamics can be predicted using technical analysis indicators
- Predictability of EUR/USD trend. As noted above, the economy of the EU and the US are among the most transparent in the world.
- Availability of liquid derivatives on EUR/USD. This allows investors to trade on the EUR/USD not only in the spot market, but also to use derivatives such as futures, options, CFDs.
EUR/USD quotes are sensitive to fundamental factors. In particular, Euro/dollar value depends on the monetary policy of the US Federal reserve and the European Central Bank, as well as from the difference in key interest rates by the FRS and the ECB. The overall economic situation in the US and the EU, statements of large corporations, dynamics of raw materials and commodity markets also affect the Euro/dollar pair trading. In addition, analysis of the most popular currency pair EUR/USD is impossible without taking into account geopolitical factors.
The pair of U.S. dollar and Japanese yen (USD/JPY), the top currency of the Asian trading session, acts as a worthy competitor to the previous pair. USD/JPY (dollar/yen) is the second level of liquidity tool in the Forex market. It accounts for about 17% of transactions on the foreign exchange market.
Its benefits include:
- Favorable terms and conditions. As noted above, USD/JPY is among the top three most liquid instruments in Forex, what determines low spreads.
- Ability to predict price dynamics by the means of technical analysis, thanks to its high liquidity.
- Sensitivity to fundamental factors. The price dynamics of USD/JPY can be predicted by focusing on the important economic data.
- High volatility. The pair Dollar/Yen is in the top three of the most volatile instruments in the international currency market. A wide range of fluctuations in the share price provides good opportunities for experienced traders. However, new traders need to exercise caution – trading with USD/JPY currency pair is not recommended for beginners because of high volatility.
- High liquidity of trading in the morning. USD/JPY is the most liquid in the Asian trading session – from 04:00 to 13:00 in Moscow.
GBP/USD (British pound/US dollar) currency pair – is the third level of liquidity Forex instrument. Operations account for about 12% of the total trading volume on the foreign exchange market. The pair pound/dollar is characterized by high volatility and instability of prices. Therefore, it is popular and the most traded currency amongst professional traders focused on short-term aggressive strategies. The pair quotes are sensitive to fundamental factors and statistical data on the state of the British economy and the actions of the Bank of England, as well as to macroeconomic data in the USA.
The pair pound/dollar is a convenient tool for professional traders who prefer aggressive short-term strategy. The pair have high volatility, allowing you to maximize profit on short time periods. In addition, a higher rate of the Bank of England compared to the U.S. Federal reserve allows financial market participants to use the pound sterling as a tool for medium and long – term investments. It is undoubtedly, one of the best currency pairs to trade.
AUD/USD and USD/CAD currency pairs are characterized with much less liquidity. They are held out as commodity currency pairs, as their prices are closely correlated with gold and oil. Australia is a large producer of gold and therefore the price of AUD/USD, as a rule, is highly dependent of gold prices. Similarly, Canada is one of the largest oil producer in the world, and therefore the price of USD/CAD are heavily reliant on oil prices.
Cross-currency pairs (Crosses)
Cross-currency pairs (Crosses), i.e. pairs that are formed without the US dollar. From the point of view of trading activity, they are behind. This group includes the following popular currency pairs: AUD/CAD, AUD/CHF , AUD/JPY, AUD/NZD, CAD/JPY, CHF/JPY, EUR/AUD, EUR/CAD, EUR/CHF, EUR/GBP, EUR/JPY, EUR/NZD, GBP/AUD, GBP/CHF, GBP/JPY, NZD/JPY. This list is not exclusive, as there are more traded currency pairs. Of course, not all of these popular cross-currency pairs should be used in trading. For classic trend trading the most preferred and the best currency pairs to trade with the yen, are EUR/JPY, GBP/JPY, AUD/JPY, NZD/JPY. However, as in the case of USD/JPY, the most traded currency pair in the world, it is highly susceptible to various influences, therefore, it is better to exclude them from the trading portfolio of a new trader, who does not possess complex analysis technical forecasting experience.
Exotic pairs (Exotics), i.e. currency pairs that represent the intersection of currencies of countries less significant in economic terms with the U.S. dollar and between each of them. Here we can name USD/RUB, USD/MXN, EUR/DDK and many others, the volumes of trading of such currency pairs are small. These currency pairs are characterized by low liquidity, high volatility, high spread and risks. Profitability of transactions on these assets is inevitably susceptible to decline because of the exotic currency pairs are poorly amenable to technical analysis, and forecasting of their trend is very difficult. They are no not so many market participants, who trade them, and usually these are the representatives of the countries concerned.
Now, let’s sum up all the above and determine the most predictable and the best Forex currency pairs to trade for beginners and experienced traders. In our opinion, best currency pairs to trade for beginners are EUR/USD, GBP/USD, NZD/USD, AUD/USD; and for experienced traders – EUR/USD, GBP/USD, NZD/USD, AUD/USD, USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY, USD/CHF, XAU/USD.
Beginners are not recommended to trade many currency pairs at the same time. Specialization in one or two instruments gives much better results, and knowledge of successful trading on the major and most traded currencies in the world. You can gradually expand your trading portfolio with new currency instruments. Concentrate on the most simple and quite popular currency pair, and it will bring you profit subject to observance of other Safe trading rules!
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