When trading in forex, it is very important to understand forex currency pairs and exchange them according to their values. We at BlueSuisse want to make pairing a piece of cake and guide you towards the combos that work for you.
So, let’s learn more about forex currency pairs in this article, the types of forex currency pairs, and give our best advice on how to choose. You’ll find choosing your pairs much easier by the end.
What Are Forex Currency Pairs?
A currency pair is simply one currency value compared to another. For instance, the EUR/USD chart displays the value of the euro in U.S. dollars.
If a currency pair is quoted like EUR/USD at 1.1200 you get $1.12 and you pay 1 euro. All currency pairs are quoted like this, with the reference currency left and quote currency right.
Understanding Forex Currency Pairs
Every day, there are more than 190 currency pairs exchanged in the world foreign exchange (forex) market. Yet, the bulk of trading activity is concentrated within a few popular pairs.
These are generally divided into major pairs, minor pairs, and exotic pairs. When trading currencies in forex, you should consider market values, market conditions and the overview of your assets.
Top currency pairs include the U.S dollar against euro (EUR/USD), yen (USD/JPY), British pound (GBP/USD), Swiss franc (USD/CHF), Australian dollar (AUD/USD) and Canadian dollar (USD/CAD).
These are the most liquid, spread tightest, and highest trading volumes in the world. With their high liquidity, major pairs are perfect for day traders seeking small profits from the daily price swings.
Minor currency pairs are based on the dollar vs other international currencies that trade less heavily than majors. Examples are EUR/JPY, EUR/GBP, GBP/JPY, EUR/CHF, AUD/JPY. Minor pairs aren’t as active as majors, but they’re still good options to trade as they’re volatile and offer more swing potential.
In addition to the majors and minors, exotic currency pairs account for all other lesser traded world currencies. They are the most volatile, but also riskiest with their lack of liquidity and spreads.
Exotic pair trading requires experienced traders who understand the peculiarities of the exotic pairs. Examples are USD/PLN, USD/HUF, USD/CZK, USD/ZAR, and USD/TRY. Beginner forex traders are advised to trade with more stable currencies rather than more volatile currencies such as exotic currency pairs.
How to Choose Currency Pairs in Forex Trading?
There are so many currencies out there, it’s important to be aware of which ones you should be trading and which pairs are going to increase your success rate.
A currency pair may not be the perfect choice for every trader, so creating your own unique strategies when trading forex is crucial to protecting the profit margin of your assets.
Here are the most important things to take into account when picking pairs:
- Liquidity - High volume of trades = less spreads & more orders executed with less slippage. This makes major currency pairs the most stable bet for the majority of traders.
- Volatility - Pairs that experience higher daily volatility present a higher potential to profit while also taking on greater risk.
- Trading Style - Day traders may be more attuned to liquid majors on intraday, whereas swing/position traders might prefer more volatile minors or even exotic pairs.
- Economic Factors - Look for combinations of currencies from nations whose economies closely correlate or frequently publish major reports together.
What are The Most Traded Currency Pairs in the Forex Market?
In terms of volume and liquidity, three major currency pairs consistently dominate forex markets the world over: EUR/USD, USD/JPY, and GBP/USD. On a typical day, more than $5 trillion of these pairs are traded, or well over half of the world’s FX volume.
EUR/USD, or "the euro", is the single most traded pair. It’s traded for more than $600 billion per day, which makes it the most liquid pair in the world. It is popular because it is the main vehicle for executing transactions between Europe and the U.S.
Next on the list is USD/JPY with daily volumes exceeding $200 billion. Japan’s economy is the second largest of all FX participants, and its biggest trading partner is the U.S. With the top economies #1 and #3 of the world coming together, USD/JPY is very liquid.
GBP/USD, sometimes referred to as "cable" completes the top three and more than $150 billion are traded daily. Its intersection with the 4th and 1st largest economies makes it a globally relevant indicator of risk sentiment. Its high correlation to EUR/USD also attracts a lot of crossover activity.
Which Forex Currency Pairs are Most Profitable in Trading?
Given the variety of currency pairs out there, it’s tempting to think about which pair is more likely to pay off long-term. But there’s no “the best currency pairs to trade in forex” or “the most profitable currency pairs in forex” – all it takes is a good strategy and solid risk management for each type of instrument.
Having said that, some traits do indicate more profit potential. Highly volatile pairs have larger daily swings – meaning bigger gaps for the trader to exploit. Minor pairs such as AUD/CAD, NZD/CAD, EUR/GBP fall into this category.
Pairs with currencies from emerging markets can also be attractively volatile because they are highly sensitive to global risk sentiment. Some examples are USD/TRY, USD/ZAR, USD/MXN. But their low liquidity makes trading expensive.
Index pairs such as EUR/JPY exhibit very explicit trends at higher time frames and allow swing traders to cash out on extended movements. The EUR/GBP and GBP/JPY minors too tend to be trend-sensitive.
Trading Strategies for Forex Currency Pairs Beginner’s Guide
When creating a strategy, do not forget to examine both your own assets and the market conditions of the currencies you want to trade. Now that you have a solid grasp on currency pairs, it’s time to start creating strategies for them.
Here are some effective approaches:
- Day Trading Majors - Track the short-term chart and technical data to identify reversals and breakouts on very liquid pairs such as EUR/USD and make intraday gains quickly. Tight stops are key.
- Swing Trading Minors - Combine recognizable swing patterns such as moving averages with medium-term minors with high volatility looking for multi-day or weekly breakouts. Trailing stops secure profits.
- Carry Trading - Benefit from interest rate differentials by taking long positions in high yielding currency, and short positions in low yielding currency. Watch fundamentals for roll-over trades.
- News Trading - Check economic data and the central bank’s policies regarding pair elements.
- Scalping - Use order flow analysis to identify order imbalances at lower timeframes. Jump in and out at lightning speed for quick gains.
- Basic Data - Research macroeconomic indicators, central bank policies, political risks, and other global factors that can shift supply and demand from one currency to another.
Common Mistakes to Avoid When Trading Forex Currency Pairs
When trading, it is important to remember that the forex market is a volatile market. Therefore, each currency pair may not always be as profitable as you think. There are some points that forex traders should consider when exchanging between these pairs.
Below, you can find the most common pair trader mistakes:
- Over-leverage - Don’t bet more than 2% of your account on any trade. Small losses can lead to ruin with excessive leverage.
- Check multiple price sources - BlueSuisse platforms aggregate live market quotes from top liquidity providers for the most accurate GPS navigation.
- Lack of risk management - Always set stop losses to reduce downside. Trailing stops preserve profits from successful trades.
- Failing to pay attention to fundamentals - International macro news such as central bank meetings can turn currency markets upside down. Keep abreast of powerful news.
- Emotional trades - Make a strategy and execute without being distracted by your fear or your greed. Automate decisions where possible.
- Not testing plans - Backtest your system hard before taking on live money. Demo trade to test it out.
BlueSuisse offers its clients sophisticated risk management, educational tools and low-cost trading to tackle these obstacles.
Knowledge of currency pairs provides the framework for an effective forex trading session. BlueSuisse facilitates pair trading with low spreads, high-quality execution, and advanced platforms. Create your live or demo account now for free and discover the world of forex trading.