Every aspiring Forex trader is eager to start trading right away after they have opened a live account and downloaded the MetaTrader 4 or MetaTrader 5 platform. At exactly that moment they face the first big question: Which currency pair do I trade? Should it be the EUR/USD or the USD/JPY? Or perhaps even go for more exotic pairs like USD/MXN and EUR/TRY? In order to answer these questions, we need to clarify what a currency pair is, examine the currency pairs that are most widely traded and evaluate the advantages and disadvantages of trading one pair compared to another.
What is a currency pair?
If you look at a Forex quote you will see that currencies are quoted in pairs where the first currency is called the base currency and the second currency is called the quote currency. When you are trading a currency pair, you are simultaneously buying one currency and selling another. For example, let’s say that you want to trade the EUR/USD currency pair. If you buy EUR/USD by placing a “long position”, you are buying Euros and selling US dollars. In this case you expect that the value of the Euro will go up compared to the US Dollar and you can sell it at a higher price, thereby generating a profit. You can also perform the opposite transaction by selling EUR/USD and placing a “short position”. In this case you’re selling the currency pair and will then buy it back when the price drops, thus generating a profit.
Major currency pairs
On the currency exchange market, there are several currency pairs which are traded more than others. The name “major currency pairs” refers to the most traded currency pairs on the market. Since these FX pairs have high liquidity, their spread is usually always lower. Examples of currencies which have high trading volume include: US Dollar (USD), Euro (EUR), Japanese Yen (JPY), Swiss Franc (CHF), British Pound (GBP), Canadian Dollar (CAD), Australian Dollar (AUD) and New Zealand Dollar (NZD). Now let’s look at some of the more popular major currency pairs.
This is the most commonly traded currency pair in the world. It is a preferred financial instrument by both beginner and experienced Forex traders because it offers great liquidity and a daily price range that often reaches 100 pips. The EUR/USD currency pair is famous for its daily trading volumes that are greater than the volumes of the next three popular currency pairs combined. Some of the factors that affect the price of the pair include the interest rate difference between the US Federal Reserve and the European Central Bank. It is observed that the pair is negatively correlated to the USD/CHF pair and positively correlated to the GBP/USD pair.
This major currency pair is very different from all other pairs. This is because both currencies – the US Dollar and the Japanese Yen – are considered safe havens by most investors. The movements of this liquid pair are smoother when compared to the EUR/USD although the USD/JPY tends to be very volatile when markets become risk averse. It is observed that the USD/JPY usually has a positive correlation with the USD/CHF and USD/CAD currency pairs.
The GBP/USD is a widely traded currency pair, and even has a nickname among traders – “cable”. It tends to be more volatile than the other major currency pairs. The typical daily price range of the GBP/USD is 150 pips and it may not be the best instrument if you are just beginning to trade Forex since the price movements of this pair may sometimes be very chaotic. GBP/USD is very sensitive to US economic data as well as the rate decisions of the Bank of England. Other factors that may affect the currency pair are key economic factors such as the trade balance, retail sales and the British Consortium shop price index.
This currency pair has an average daily range of about 100 pips and is not very volatile when compared to the other majors. The actions taken by the Swiss National bank are closely related to the Euro and for this reason when you trade USD/CHF it is recommended to keep an eye on economic activity in the Euro zone rather than relying on US data. Additionally you can pay attention to Swiss economic reports like trade balance, Central Bank interest rate decisions, retail sales and unemployment rate.
Minor currency pairs or ‘exotics’
Minor currency pairs are not traded as much as the major ones. They are sometimes also referred to as exotic pairs. These pairs are made up of one major currency, paired with a currency of an emerging economy, such as Mexico (MXN), Turkey (TRY) and Poland (PLN). Since their trading volume is lower, they are more illiquid and usually have wider spreads. Examples of minor currency pairs include: USD/MXN, USD/HKD and USD/TRY.
At LiteForex you can trade over 25 major currency pairs and currency cross pairs, and close to 20 minor FX pairs. To check the full list and choose the currency pairs you wish to trade, visit the LiteForex instruments page.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.