Which Forex pairs should I trade?

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Updated: 25 August 2020

This year has seen another influx of new private traders entering the markets, with a strong focus on forex trading. Whether trading is getting easier is still up for debate, but it is certainly getting more accessible. Brokers are tempting new forex traders with high leverage, risk-free demo accounts and in-house, broker-generated training and education.

It is no surprise that many new and experienced CFD traders are focusing on the forex market. It offers plenty of potential; there is a lot of education and research available and the market is active 24 hours a day, five days a week. Popular trading software such as the MT4 and MT5 provide an efficient, intuitive platform for traders at every level. Leverage on forex trading is usually significantly higher than that available for other trading instruments, which appeals to investors trading in CFDs. So, which currency pairs should forex traders be focusing on?

What are the most commonly traded forex pairs?

With approximately 180 legal currencies in circulation, not to mention over 1,500 listed cryptocurrencies, there is plenty of scope to buy and sell both real and virtual currencies. Cryptocurrency trading is a growing, popular and specialised market, but most forex traders still focus on real-world currencies. As a private forex trader, you can easily trade any of the currency pairs that your broker offers. Many forex brokers will offer over 50 pairs, with some offering as many as 70.

Experienced traders can make money by watching the markets closely and trading a mix of major, minor and exotic pairs, but most new traders will start with the more common pairs. The four most popular currency pairs, also known as major pairs, are:

  • EUR/USD (Euro/US dollar)
  • USD/JPY (US dollar/Japanese yen)
  • GBP/USD (British pound/US dollar)
  • USD/CHF (US dollar/Swiss franc)

Other very commonly traded currencies include the Australian dollar (AUD) and the Canadian dollar CAD). The most commonly traded pair (EUR/USD) trades significantly more than any other pair, frequently experiencing around 50% more global volume trading than USD/JPY and GBP/USD combined. These major pairs are generally active enough that they appeal to day traders and other short-term traders. They are volatile, with price fluctuations happening constantly, which presents the opportunity for both gains and losses daily. These pairs tend to have lower spreads and therefore more favourable trading conditions, but that does not mean that they suit everyone.

What are minor forex pairs?

Minor currency pairs are those that do not include the USD. Within this category, the most commonly traded pairs include the Euro, Japanese yen or British pound. Some common minor pairs are:

  • EUR/GBP (Euro/British pound)
  • EUR/AUD (Euro/Australian dollar)
  • GBP/JPY (British pound/Japanese yen)
  • GBP/CAD (British pound/Canadian dollar)
  • CHF/JPY (Swiss franc/Japanese yen)
  • NZD/JPY New Zealand dollar/Japanese yen)

These currencies also experience short-term volatility and high liquidity, making them popular with day traders and other short-term traders. Forex traders based in one of the regions using these currencies understandably often prefer to work with their base currency, and they can make many profitable trades using these so-called minor currencies. The USD is an important and valuable currency that every forex trader tends to be aware of and monitor, but there are certainly profitable trading strategies that can develop using minor currencies as well.

What are exotic forex pairs?

Exotic currency pairs include the currency of a developing economy. They tend to be less commonly traded and therefore less commonly available through forex brokers, although major ones will usually offer at least a few exotic pairs. These include:

  • AUD/MXN (Australian dollar/Mexican peso)
  • GBP/ZAR (British pound/ South African rand)
  • NZD/SGD (New Zealand dollar/Singapore dollar)
  • JPY/NOK (Japanese yen/Norwegian krone)

Exotic pairs are more difficult to trade. They are less commonly available, less liquid and tend to have higher spreads. However, they can still be profitable, particularly in times of high volatility caused by unique world events.

Often, the traders best suited to capitalize on the opportunities to profit from exotic currencies are those based in regions where that currency is the base currency. If you highly tuned in to world events that affect your region, then you may be in place to buy and sell your own currency during periods of market volatility and make a decent profit. Trading exotic currency pairs can certainly be risky, but it can also pay off with bigger gains than you might find with the major currencies.

What affects price movement in forex trading?

Most forex traders will be aware that price movements happen in forex trading for a variety of reasons. You should watch economic releases carefully when trading forex. These are reports published periodically by either government agencies or the private sector. Economic reports, data and predictions can affect prices of currencies in the forex markets with immediate effect.

World events are, of course, also a factor that will have an impact on currencies. Elections, trade agreements and political upheaval are just a few of the factors that keen forex traders watch carefully. Right now, for example, the British pound is likely to experience volatility as Brexit negotiations progress or stall with the uncertainty that has both politicians and citizens on edge. This provides potentially profitable opportunities for the experienced forex trader.

Some issues to keep in mind:

  • Technical analysis is key and still has a vital place in forex trading. Fundamentals also play a big part, but most forex traders use a combination of technical indicators to monitor and predict price movement.
  • Check those spreads. Most major currency pairs have low spreads, but not always. Trading the USD/GBP, for example, is associated with higher spreads due to the volatility of that particular pair, so wise traders will always keep an eye on this.
  • Watch your leverage. Forex brokers typically offer very high leverage. This does not mean that using it all is a good trading strategy. Always use leverage according to a solid, well-thought-out risk management strategy.