Which Forex Pairs to Trade?
Forex pairs are the two currencies involved in currency trading. You exchange or trade one currency say US Dollars for another currency say British Pounds Sterling. The forex pair in this example is USD/ GBP. The question is which are the best forex pairs to trade?
Of course it is possible to trade with any pair of currencies from around the world. In practice, however, it is the currencies of the major economically powerful countries which account for most trades. Note that I say economically powerful and not politically powerful. The Swiss Franc is the currency of a small country, physically and politically but because of the special nature of the Swiss banking system it is very economically powerful and therefore a major player in the financial markets.
Around 90% of all forex trading involves just 6 forex pairs, all involving the US Dollar as the most significant trading currency:
1) US Dollar/ British Pound Sterling USD/ GBP (sometimes known as the Cable Pair)
2) US Dollar/ Euro USD/ EUR
3) US Dollar/ Japanese Yen USD/ JPY
4) US Dollar/ Swiss Franc USD/ CHF
5) US Dollar/ Australian Dollar USD/ AUD
6) US Dollar/ Canadian Dollar USD/ CAD
According to a recent study, the US Dollar is involved in 85% of all trades and the Euro 37%, followed by the Japanese Yen, British Pound Sterling, Swiss Franc, Australian Dollar and Canadian Dollar in order of significance.
When first entering the forex trading market, it is advisable to begin with the USD/ Euro forex pair because there is so much more information concerning these currencies which because they tend to me more stable and more easily manageable result in lower costs.
Some currencies can make difficult forex pairs and should be avoided by the beginner to start with. For example, the Canadian Dollar and the Japanese Yen can be a difficult partner in any forex pair because they are both influenced by fluctuations in the price of oil (Canada is a large oil exporter and Japan a large oil importer).
Of course oil as an example is just one of many influences effecting currency movements and the experienced forex trader will know what to look out for. However, for the beginner my advice would be to trade with the USD/ EUR pair for a while to gain experience and then maybe the USD/ GBP pair as an alternative before moving on to the more volatile forex pairs.
Questions and Answers
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