Most traders prefer to trade with stable currencies, such as the Euro or the US Dollar, but trading with currencies from emerging countries may create exciting opportunities to make a profit for more experienced traders. Trading success will depend on the ability to read market trends and respond swiftly, and choosing the Best Currency Pairs for Professionals based on economic performance, market volatility and predictability of price movements.
What is a currency pair?
Currencies are always bought or sold in pairs and they are traded as one unit. The currency on the right is the Base currency or Transaction currency, and the currency on the left is the Quote currency or Counter currency. Profit is always received in the Quote currency.
Currency pairs are usually chosen based on the state of the economies they represent, the types of spreads they have, and exchange rates.
When a trader sells a currency pair, the Quote currency is bought and the Base currency is sold.
When a currency pair is bought, the Quote currency is sold and the Base currency is bought.
What types of currency pairs are there in Forex trading?
Currency pairs are divided into 3 main categories based on how stable and predictable they are, their levels of volatility and liquidity, and their spreads.
Each category may appeal to traders with different levels of experience and trading strategies, so it will depend on your risk appetite and budget.
What are Major Currency Pairs?
Major currencies originate from the most developed countries and the US Dollar will always be either the base currency or the quote currency.
Majors are characterised by high liquidity, low volatility and tight spreads. Trading with major pairs is a safe option for beginners and experienced traders.
The US Dollar appears more than any other currency in Forex transactions and it is also the global reserve currency, used by most central banks and major financial institutions.
This is because the economy of the US is large and developed, making price movements of the USD more stable.
The most powerful major currencies are the US Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Australian Dollar (AUD), the Swiss Franc (CHF) and the Canadian Dollar (CAD). Despite how stable the currencies are individually, pairing them might create volatility!
All major currencies have tight spreads and it is safer to avoid currency pairs with high spreads.
However, trading with higher spreads means that there are more fluctuations in price movements, which creates exciting opportunities for profit.
Majors are extremely liquid currency pairs with very little volatility, limited risks and low spreads. They represent some of the most developed and stable economies in the world. Some examples are EUR/USD, USD/JPY and AUD/USD.
Major currency pairs have the following characteristics:
- USD/EUR: A very popular pair with high liquidity with low volatility, low risks and tight spreads.
- USD/GBP: Another popular pair with high liquidity, high volatility, tight spreads and medium risks.
- USD/JPY: Also a popular pair with medium risks, tight spreads, medium volatility and high liquidity.
- USD/CAD: referred to as “The Loonie”, this pair has tight spreads with low risks, medium volatility and high liquidity.
- GBP/USD: also known as “The Cable”, this pair has high liquidity, low volatility, tight spreads and low risks.
- USD/CHF: also called “The Swissie”, this pair is very popular with its tight spreads, low risks, high liquidity and medium volatility.
- AUD/USD: commonly known as “The Aussie”, this popular pair has high liquidity, high volatility, tight spreads and medium risks.
What are Minor currency pairs?
Minors exclude the USD in all currency pairs, but they include one of the other major currencies, namely EUR, GBP and JPY.
The spreads of minors are slightly bigger with less liquidity and more volatility, but they are stable when paired with a major currency.
Minors are challenging to trade with because they have lower liquidity with increased volatility.
They do not include the USD, but any of the other major currencies can be added to increase stability and liquidity. They also come with bigger spreads and greater risks.
The most common minor currency pairs are 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.
What are Exotic currency pairs?
Exotics are extremely unpredictable and volatile. This is because currencies from very different economies are paired together and traded on the Foreign exchange market.
A major currency will always be combined with a currency from an emerging market or developing economy. But the sudden price movements can generate huge profits!
Exotics are usually a combination of a currency from an emerging market, with either the US Dollar or the Euro.
These currency pairs have low liquidity, high volatility, and big spreads. For traders who enjoy the thrill of high-risk trading, there is a massive potential for profit!
Some commonly traded exotic pairs are EUR/TRY, AUD/MXN and GBP/ZAR.
What is Volatility in Forex?
Volatility levels indicate how quickly and how much the prices of currencies change in a trading session. The more they change, the lower the liquidity and the higher the volatility of a currency pair.
Currency pairs that change in smaller increments result in lower volatility and higher liquidity.
Volatile markets may intimidate new traders, but experienced traders have a greater appetite for risk and understand how strategies and tools can be used to navigate unpredictable markets.
There are two types of volatility:
- Historical volatility: calculations are base on historical prices, and deviations of the value of an asset within specified timeframes are standard.
- Expected volatility: calculations are based on current prices and traders expect that market prices of assets reflect anticipated risks.
How can volatile currencies be identified?
The volatility of a currency depends on the state of its economy. Economies with high inflation, unbalanced government accounts, deceptive policies, unpredictable monetary systems, and unstable political mechanisms, tend to have high levels of volatility.
Currencies with high volatility carry greater risks because their pips fluctuate frequently over shorter periods of time, but this is also a valuable opportunity to accumulate profits from jumps in price.
The most volatile major currency pairs are AUD/JPY, NZD/JPY, AUD/USD. CAD/JPY and AUD/GBP.
The most volatile currencies are the Brazilian Reel, the Russian Ruble, the Mexican Peso and the Argentine Peso.
On the contrary, the least volatile major currency pairs are EUR/USD, USD/JPY, GBP/USD and USD/CHF.
The least volatile currencies are the Norwegian Krone, the Singapore Dollar, the New Zealand Dollar, the Hong Kong Dollar and the Swiss Franc.
However, Exotic currency pairs have the highest level of volatility because they represent unstable economies in developing countries.
What are the Forex market hours?
There is no central location for Forex markets and the markets operate through central banks, financial firms and Forex brokerages, 24 hours of weekdays.
The markets you choose to trade in will depend on the currency pairs you trade with, as the markets are affected by timezones.
Every exchange operates independently, but all of them trade the same currencies and trading when multiple exchanges are open will increase trading activity.
What is Fundamental and Technical analysis in Forex?
Fundamental and Technical analysis is a means of predicting how prices will move based on logical and strategic thinking so that a profit can be made if the prediction is correct.
It is essential for every trader to understand how this method of analysis works.
Technical analysis predicts movements based on price action and respective indicators, such as support and resistance levels.
Fundamental analysis predicts movements based on macro-economic data, news events and developments in economies.
Approaching the foreign exchange with no understanding of how to do Fundamental and Technical analysis, exposes you to extreme risks regardless of your level of experience.
Economies can change suddenly, but making calculated and informed predictions increases your chances of success.
Major currencies are the safest to trade with, but not necessarily the most profitable. The Best Currency Pairs for Professionals depend on the strategies used, trading experience and preferences, and income goals and trading budgets. You can experiment with Minor and Exotic pairs once you are confident that you can use a strategy, predict price movements and use trading tools comfortably. Remember to stick to your trading budget and trade responsibly!