Trading on the foreign exchange (forex) is not for the lighthearted. Selecting the right currency pairs can significantly impact your success as a trader. In the fast-paced world of forex trading, with a myriad of options available, understanding which currency pairs offer you the best trading opportunities requires a blend of analysis, strategy, and market knowledge. Here are some expert tips and opinions about which currency pairs are the best to trade and why.
1. Choose a reliable broker
You need a broker to access the FX market. Look for a broker regulated by a recognised financial authority in your country. Look at fees and commissions.
2. Open a trading account
The broker you choose will open a trading account for you. You will have exclusive access to your account with your own username and password, which will give you access to FX platforms. Your broker will ask you to make an initial small deposit to the account. This is the amount of money you will have to make to sell and buy positions.
3. Develop a trading plan
Your trading plan is your trading strategy, desired goals, and chosen risk tolerance. You need to educate yourself through analysing markets, studying previous trends, and staying up to date with the news to give you background understanding of the geopolitical and economic effects that might influence the market. Having a trading plan will keep you disciplined with an entry and exit strategy, this minimises a concept called emotional trading. Emotional trading is when you take decisions based on an inflow of emotions that will, more often than not, cloud your judgement.
4. Practice on a demo account
Your trading platform will have the option to open a demo account. This account gives you access to real time market movements and the ability to buy and sell with no real money involved. It gives you the space to experience the rush of the market without risking your money.
5. Start trading
After you’ve practised on the demo account, it’s time for you to take a step into the real FX world. Start by executing small trades and analyse and understand the sensitivity of each trade on the market. Increase the size of your trade as you get more comfortable with the market.
Firstly, you have to understand what a currency pair is.
Currency pairs are denoted by combining the symbols of two different currencies, where the first currency listed is the base currency and the second is the quote currency. For example, in the EUR/USD pair, EUR is the base currency, and USD is the quote currency. The exchange rate indicates how much of the quote currency is needed to purchase one unit of the base currency. So, using the same example, this would translate into how many euros is needed to purchase 1 US dollar.
There are several factors that you must understand and take into consideration when deciding as a trader what currency pairs to trade.
Market liquidity
Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price. Major currency pairs like EUR/USD and GBP/USD are highly liquid because they involve currencies of major economies with robust financial markets. High liquidity ensures tighter spreads and less slippage.
The slippage is the difference between expected price and actual execution price
Volatility
Volatility represents the degree of price fluctuations within a certain period. While higher volatility can present trading opportunities, it also increases risk. You should often seek a balance between volatility and predictability when choosing currency pairs.
Economic stability and news events
Economic stability and news events significantly impact currency values. You should monitor economic indicators, such as gross domestic product (GDP) growth that indicate economic health, inflation rates, and employment figures, and geopolitical events such as elections, trade agreements, etc. that can affect currency pairs.
Correlation
Some currency pairs exhibit strong correlations, meaning they tend to move in a similar direction. Understanding correlations will help you diversify risk and identify potential trading opportunities.
So what are the best currency pairs for trading?
Based on the above factors, certain currency pairs are favoured by traders:
1. EUR/USD (Euro/US Dollar)
The EUR/USD pair is the most traded currency pair globally, accounting for a significant portion of daily forex trading volume. It combines two of the world's largest economies, the Eurozone and the United States, making it highly liquid and less susceptible to manipulation. Traders benefit from narrow spreads and ample trading opportunities due to its popularity and stable economic fundamentals.
Mohamed Hashad, chief market strategist of investment firm Noor Capital, said that the EUR/USD pair acts as a safe-haven pair attracting traders during risk aversion.
EUR/USD adheres well to technical patterns and levels. Traders use chart patterns, moving averages, and Fibonacci retracements effectively.
“EUR/USD, consisting of the euro quoted in terms of the dollar, is the most traded forex pair. EUR/USD benefits from liquidity, narrow spreads and frequent market-moving news. EUR/USD is popular among because of the US and Eurozone’s economic strength, providing consistent volatility and decent trading opportunities.”
2. GBP/USD (British Pound/US Dollar)
The GBP/USD pair is known for its liquidity and volatility. It is influenced by economic data from the UK and the US, as well as geopolitical events related to Brexit and US economic policies. Traders often seek opportunities in this pair due to its significant price movements and trading volume.
Nadia El Bilassy, senior market analyst at trading brokerage company Equiti group, shared some background that you should take into account when trading this currency pair saying, “The GBP/USD rose for almost seven consecutive days, when the UK elections were at the forefront. Following the Labour Party's sweeping victory, the pound gained momentum against a weakening dollar. As market focus shifts to the ‘bad data has become good data’ narrative, the pressure remains on the dollar, thereby boosting other assets against the USD.”
3. USD/JPY (US Dollar/Japanese Yen)
The USD/JPY pair is popular among traders seeking exposure to the Asian markets and fluctuations in global risk sentiment. Japan's status as a major exporter and its policies on interest rates influence the pair's dynamics. Traders often use USD/JPY as a barometer for global economic health and as a safe-haven currency during times of uncertainty.
El Bilassy gave insights when asked about what you should consider when trading this currency pair saying, “The USD/JPY has also gained a lot of traction lately after surpassing key levels beyond the 160 handle intensifying speculations over another Bank of Japan intervention, as it continues to go up, any signs of intervention will push the yen high up from depreciating more, giving another opportunity to sell the pair.”
4. USD/CHF (US Dollar/Swiss Franc)
The USD/CHF pair is characterised by its stability and low volatility compared to other major pairs. Switzerland's reputation as a financial safe haven and its stable economy make the Swiss Franc (CHF) a popular choice during times of market turmoil. Traders often use USD/CHF to hedge against risk or as a proxy for EUR/USD movements.
5. AUD/USD (Australian Dollar/US Dollar) and NZD/USD (New Zealand Dollar/US Dollar)
The AUD/USD and NZD/USD pairs, also known as the commodity currency pairs, are influenced by commodity prices,especially metals and agricultural products. Australia and New Zealand's economies are closely tied to commodity exports, making these pairs sensitive to global economic trends and commodity market movements. Traders often capitalise on these pairs' volatility and correlation with global economic cycles.
The answer to the question of what currency pair is best to trade will not solely rely on the above mentioned pairs and reasons, it will vary from one trader to the other and this depends on your individual goals as a forex trader.
How should you choose the right pair for you?
While the above pairs are popular among traders, the best currency pairs to trade ultimately depend on your own trading style, risk tolerance, and market conditions. You should conduct thorough research, analyse historical data, and stay informed about economic developments to make informed decisions.
“Traders, however, should always remember that no pair is universally ‘best’ – it depends on the trader’s trading style, risk tolerance, and analysis,” said Hashad.
“Profitability generally depends on your trading strategy and the discipline you use when implementing it. Many short-term forex traders consider the EUR/USD currency pair the most profitable to trade due to its high liquidity in all trading sessions, decent volatility levels, and frequent market opportunities.”
Selecting the best currency pairs for forex trading involves balancing liquidity, volatility, and market conditions. Major pairs like EUR/USD and GBP/USD offer high liquidity and stable trading opportunities, while pairs like USD/JPY and USD/CHF provide insights into global economic trends and risk sentiment. Understanding these dynamics will empower you as a traders to navigate the forex market effectively and capitalise on trading opportunities.
“While tempting as a way to get some fast action in the financial markets, forex trading comes with huge risks due to the leverage offered by brokers. You can get exposure of 100:1, which means that with a mere $1000, you can trade positions of up to $100,000 and more,” said Kartik Iyer, chartered financial analyst at a private bank in DIFC.
So your profits and losses will be magnified by a factor of 100, leaving your money vulnerable to the whims of the markets
As the forex market continues to evolve, staying informed and adapting to changing market conditions remains crucial for successful trading in currency pairs worldwide.
