What are the best currency pairs to trade

For people new to the wonders of the financial world, the phrase ‘currency pair’ might seem a little strange to you. You know of currencies, sure. There’s the US dollar and the British Pound, and also, the Euro and the various pesos that are used across Latin America, but you didn’t know that currencies could come in pairs. Well, to be quite frank, they don’t. The term currency pair was coined in an effort to make inter-currency business transactions easier. For example, if one was a person who consistently traded the British Pound for the US dollar, then it would be easier to say that you traded the GBP/USD. It is also much simpler to write. A currency pair is essentially a price quotation structure of two currencies that are being compared to each other. In a currency pair, the base currency appears first (to the left), and the quoted currency is the second currency that appears to the right of the quotation.

Essentially, when a person is doing a transaction using a currency pair, they are buying and selling one currency for another at the same time. For example, if you are using the GBP/USD and wish to buy the currency pair, then what you would be buying is the base currency, which is the British Pound, while you are selling the US dollar (the quote currency) at the same time. The opposite is also true. If you are selling a currency pair then you are simultaneously selling the base currency while buying the quote currency.

For the world of currency trading, learning about forex pairs may seem like the number one thing that a trader should learn. Well to put things simply, It isn’t. While important, the first steps that a forex trader should learn is to know how the mechanics of trading works, the terms surrounding the trading world that he will encounter during his trading, and the ways in which he would go about trading in a safe and profitable way. Learning about the best forex trading pairs comes afterwards and isn’t as black and white as you may first think.

The Confusing World of Pairs

In currency trading, what many traders generally think of as the best currency trading pairs, are the pairs that are the most popular traded in the financial market. These are what we usually refer to as the Majors. These are the currency pairs which trade the most volume against the US dollar and which many use as the standard in international trading, and other business transactions. They are also considered the most liquid pairs in the world. Now because of their popularity, many are familiar with these currency pairs. The table below indicates the major currencies.

Now you may wonder why people trade these pairs more than others, apart from the fact that they are generally the currencies used in major business transactions. This is because these majors, tend to have very tight spreads. This means that the difference between the bid and ask price for their currency pairs is very small, thus giving the forex trader an advantage when trading, particularly if he is making short term trades. This is especially good for scalpers and day traders who generally do not keep their trades for long periods of time. Without this, it would be nearly impossible for these types of traders to make reasonable profits. It must also be noted that of all these majors, the EUR/USD (The Euro Dollar) is the most traded pair, bringing in an approximate daily trading volume of 30% in the forex market. So, this is generally the most popular forex currency pair, and arguably, the best currency pair to trade.

The Crosses

Just like in the world of social interaction where there are a group of people that fall second in line to those that are the most popular, the same applies with currencies. In currency pairs, these are the ones referred to as the cross pairs. These cross currency pairs do not contain the US dollar. Instead, many of them contain mixes of the other major currencies, for example, the British Pound, or the Euro. These particular crosses are referred to as ‘minors’. It should be noted that more active of these cross currency pairs are those that have the following currencies: the Japan Yen, the Euro and the British Pound. We will be dividing the currencies pairs accordingly:

Now of course depending on whichever part of the world you are located, it may make more sense for you to trade the Yen crosses than other pairs. This is especially true, if you are located in parts of Asia, where you require the yen for day to day transactions. When trading these cross pairs it is important to stay tuned to any news events that may affect the markets, as particular Yen crosses are known to be quite volatile, like the GBP/JPY. In certain forex circles, this pair is infamously referred to as ‘the Dragon’. This is for good reason, this pair has been known to swing sharply, moving several pips in the space of one candle. Depending on where you enter a trade, this can be either to your profit, or to your detriment.

For Yen crosses it is also especially helpful to look at the movement of other Yen crosses as they tend to move similarly. As a rule of thumb, if you are going to trade a Yen cross pair, it is wise to look at the general movement of the USD/JPY, as the yen cross pairs tend to follow the action of this pair in particular. For example, if the USD/JPY just bounced back from a major resistance line, then you should be looking at the yen cross pairs like the GBP/JPY for similar action.

The Euro Crosses are the next cross currency pairs for us to tackle. These pairs as the name suggest are cross currency pairs which are paired with the Euro. These tend to be the more popular of the cross pairs and for many living within the Euro-Zone they consider these the best currency pairs to trade.

These Euro cross pairs tend to more sensitive to Euro and Swiss Franc news, than say the majors like the USD/CHF or the EUR/USD. This is so because of how strong the influence of the US dollar is in the major currency pairs. For pairs like the EUR/GBP, traders should watch out for major British Pound news as this pair has been known to be affected greatly by it.

Also, US dollar news tends to affect the Euro, so traders who are using the Euro crosses should be wary of any US dollar news that is expected.

For the third type of cross pair, the Pound Cross, it is essential for a good trader to keep track of any fundamental news that is expected to affect the British Pound. There are only four main Pound crosses and there are indicated in the table below.

Like its Yen counterpart the GBP/CHF is greatly loved by trading speculators because of the level of volatility that this pair offers. It is not unusual for this pair to move over 300 pips in one trading day. As such, there is great potential for reward. People trading these pairs should be careful as it is known that spreads with these pairs can be wider than others. For the very volatile ones like the GBP/CHF it is recommended that those who are new to Fx trading to stay away from them, until they gain more experience in currency trading and learn how the markets move.

The Others

If you were counting the types of crosses that we covered, you may have noticed that there are a few that we did not mention. These are the ones that fall outside the realm of the typical major currencies and as such they are not usually considered the best forex trading pairs for beginners, who tend to need the advantage of reasonable volatility and tight spreads. These are the cross pairs that do not fit into any specific category. They are indicated below.

Because these fall outside the realm of the stronger major currencies in crosses, they tend not to be considered the best currency trading pairs, but this does not mean that they are good pairs to trade. Many forex traders use these pairs with very effective results. They are also a great alternative to trading the major and other cross currency pairs when they are no set ups on either.

Picking the Very Best – The Best Forex Pair to Trade

Now that we have covered the general best forex pairs to trade then of course we’re sure that you are expecting for us to tell you which of the many currency pairs that we discussed is the best forex pair to trade. By no means are suggesting that these are the only forex pairs out there. There are many others, generally not traded my many retail traders. These are exotic currency pairs, that fall outside of the cross pairs and the major currency pairs. They tend to be currency pairs from small economies or from developing countries. An example of that would be the Thailand Baht (THB) or the Denmark Krone (DKK). Many Forex traders avoid these exotic currencies because they tend to have very large spreads and the volatility is not as large because the daily trading volumes tend to be small in comparison to the majors.

At the end of the day however, a trader has to decide for himself which will of the currency pairs will be the best forex pairs to trade. This is because other factors are at play when it comes to a trader’s profitability. Any trader can make money with any pair that he is given, but a wise trader will take precautions to decide which conditions suit him best. So, it is advised that a trader picks pairs that will be suited to his trading hours. For instance, it is good to trade AUD pairs when the Australian session opens, and even better to trade the AUD/JPY when both markets cross over. It is also wise to trade majors, when the New York session is active. Now these suggestions may seem like common sense to you, but many traders overlook these things and wonder why they are not getting the amazing results they are looking for. If you are one falling into this category, then perhaps you should take a look at the pairs that you are trading.

Perhaps you are a low-risk trend trader, but you find you have been trading pairs that tend to have a high volatility. These conditions would not be suited to your style of trading. Perhaps you are a scalper and you now realize that you have been trading currency pairs that have a wide margin. This could be the reason that your profitability is not at the place where you want it to be. The first step to recognizing these things is to analyse all the conditions that play a role in your trading: your trading hours, the spread, the volatility, all compared to the currency pairs that you choose to trade. If you have not this this type of analysis, to make sure that all of these factors are aligned, then it could be an issue that will affect how profitable you are in the long run. As with everything concerning Forex trading, practice and mindful reflection of all decisions that you make, are the ways to improve your trading skills.