The forex exchange market is the largest trading market, with people participating worldwide. Forex trading involves buying and selling currencies, where the trading occurs between currency pairs of two countries.
The currencies are identified by their ISO currency code. For example, the Canadian dollar is CAD, the Australian dollar is AUD, etc.
This article covers everything you need about currency pairs, so continue reading to learn more.
Table of Contents
Top 7 Forex Currency Pairs To Trade
Below are the most popular currency pairs:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
- USD/CAD
- AUD/USD
- USD/CNY
EUR/USD
The most commonly traded currency pair is the euro and the dollar, which stand for the world's two largest economies. This currency pair is also known as “The Fiber.”
This currency pair accounts for around 24% of all daily transactions on the forex market, which is not strange considering that these are the currencies of the two biggest economies in the world- The United States and the Eurozone.
This pair is a good choice for new traders because of the spread's high volume and low fluctuation. The EUR/USD is a subject covered in great detail online, so you can avoid making mistakes by researching.
USD/JPY
The USD/JPY pair also referred to as “The Gopher,” is one of the best pairs that most Forex trading platforms provide. This pair displays the US Dollar's value in relation to the Japanese Yen, effectively serving as a proxy for Asia's economic health.
Given the size of Japan's export industry, this currency pair has some of the highest liquidity on the market. It has low spreads. The currency pair can thus be bought and sold by traders without fluctuating the exchange rate.
As rivalry increases in fields like technology and e-commerce, it has also become a popular means of expressing the relationship – or rather tensions – between the American and Asian regions.
GBP/USD
The British pound/US dollar exchange rate, also referred to as “The Cable,” is a popular one. The GBP/USD is a currency that day traders choose because it allows them to enter and exit the market quickly and precisely while taking advantage of price changes. This makes it a top forex pair for swing trading, another short-term forex strategy. ‘
Due to its rapid price changes, this currency pair is more volatile than “The Fiber” or “The Gopher.”
The currency pair is volatile, and these significant jumps have greatly boosted the demand for the pair. But keep in mind that higher volatility also entails higher risk. Therefore, it's crucial to place stops and limits to secure your trades.
Before taking any positions, it is advised that traders of this volatile currency pair brush up on their technical analysis skills.
USD/CHF
The dollar and the franc are the currencies that make up the pair USD/CHF. The currency pair displays the exchange rate between the quote currency, the Swiss franc, and the U.S. dollar (the base currency).
The USD/CHF, commonly referred to as the “swissie,” is the fifth most traded currency on the Forex market. Due to the safety and neutrality of Switzerland, it is seen as a safe haven pair and is utilized as a reserve currency by markets worldwide.
USD/CAD
This important currency pair consists of the US and Canadian dollars.
Given that Canada's economy is largely dependent on oil exports, the value of the Canadian dollar is also closely connected to commodity prices, particularly the price of oil. As a result, if you want to convert USD to CAD, it is crucial to keep an eye on the price of oil to choose when to buy.
It's also important to keep in mind that because oil is traded in US dollars, the Canadian currency will likely appreciate against the US dollar if the price of oil rises.
AUD/USD
This is the 6th most commonly traded currency pair – The Australian dollar (AUD), Australia's national currency.
This pair, commonly known as the “Aussie,” gives traders a method to track Australia's economy's expansion (or recession).
The price of AUD/USD can be affected by various factors, with commodity prices being one of the key ones. Australia produces a variety of well-known commodities, including iron ore, coal and copper, due to its geographic configuration.
When the value of these commodities rises, Australia receives more money, which drives up the AUD/USD exchange rate.
USD/CNY
The Chinese Yuan and US Dollar currency pair is denoted by the acronym USD/CNY. It informs us of the exchange rate between the world's two major economies and exporters.
CNY alludes to currency trading in the onshore Chinese trading market. Offshore trading of the Chinese yuan or renminbi is known as CNH.
The US-China trade war is the main variable to keep an eye on when investing in this pair.
In the past, the Chinese government's efforts to lower the cost of its exports have caused the CNY's value to fall versus the US dollar.
What Are Currency Pairs?
Currency Pair can be defined as a quotation of two different national currencies where the value of one currency is relative to the other. It represents the exchange rate at which one unit of one currency would be exchanged for another.
For instance, selling the Japanese yen against the US dollar (JPY/USD) indicates that you believe the yen's value will decline against the US dollar.
How Do Forex Currency Pair Work?
In every currency pair, there is a bid and ask price.
The bid price is the price at which your broker buys your currency. When you sell your currencies, you will get the bid price.
The ask price is the price at which the market (or your forex broker) is prepared to sell you a particular currency. You will have to pay the requested price when buying currencies.
The bid price is the highest price a buyer is prepared to pay for the currency, the ask price is the lowest price a seller is willing to give for the currency. The bid-ask spread indicates the variation in pricing between the two currencies.
Since it lowers the entire costs associated with the trade, some forex traders choose to trade on currency pairs with a lower or tighter spread. To take advantage of the shifting price gaps, some traders trade on unstable currency pairs with higher spreads and less liquidity.
Types Of Forex Currency Pairs
Below are the three types of currency pairs:
Major currency pairs
The US Dollar is included in all major pairs because it is the world's top reserve currency and the most traded.
Here are the major currency pairs:
- EUR/USD
- USD/CAD
- GBP/USD
- USD/JPY
- AUD/USD
- USD/CHF
- NZD/USD
Minor currency pairs
Minor currency pairs, aka cross currency pairs, do not contain the US dollar but have at least one of the remaining three main currencies worldwide.
This means that at least one of the currencies in the pair—the Japanese yen, the British pound, or the euro – is present.
Below are the minor currency pairs:
- EUR/GBP
- GBP/JPY
- EUR/JPY
- CHF/JPY
- GBP/CAD
- EUR/AUD
- NZD/JPY
Exotic currency pairs
Exotic currency pairs combine a major currency with the currency of a developing nation (such as Turkey or Hungary). Exotic Pairings are not traded as frequently as major or minor pairs.
Some popular exotic currency pairs are:
- EUR/TRY
- USD/HKD
- JPY/NOK
- GBP/ZAR
- NZD/SGD
- AUD/MXN
What Is The Most Popular Forex Pair?
The United States dollar (USD) is the most widely exchanged currency worldwide. This is why it is used as the base or quotation currency in most significant forex pairs. These are regarded as major crosses when paired with other currencies from some of the largest economies in the world, such as Japan, China, and the United Kingdom.
Since they represent the most developed and stable economies in the world and have modest spreads that accurately reflect market value, major forex pairs are especially appealing to traders. The most popular currencies among new traders are often the major forex pairs.
Factors That Affect The Cost Of Forex Pairs
Below are the factors that affect the cost of forex pairs.
Liquidity
Forex markets are known for their liquidity. Due to the great liquidity of the currency market, transactions can be carried out promptly and effectively. But the liquidity of each currency varies.
Up to 75% of all forex turnover is made up of the major currency pairs, which are simpler to trade than minor and exotic pairs as they have the most buyers and sellers. Given the scale of the US economy, it is not unexpected that the US dollar is included in each of these partnerships.
Since spreads are tighter when liquidity is higher, less movement in the underlying market price is required for your trade to be lucrative.
Politics
Trade wars, corruption cases, elections, and policy changes cause instability, which is reflected in the foreign exchange market. The UK's decision to leave the EU is an outstanding illustration of this.
Due to the high uncertainty this withdrawal brought about on the UK's future economic prospects, traders began to lose faith in the pound. As a result, it lost a lot of value compared to other big currency pairs. Government intervention in the economy can potentially increase or decrease a currency's relative worth.
GDP
The GDP of a nation can also have a big impact on the value of its currency. The gross domestic product (GDP), which measures the value of a nation's goods and services over a given time period, is frequently used as a gauge of the state of the economy.
High commodity prices can harm GDP since they frequently cause increased inflation. Due to the possibility of an impending recession, slow (or poor) GDP growth will put downward pressure on a nation's currency.
Volatility
On the more volatile currencies, traders typically take smaller stakes and larger positions on the less volatile ones. Any of these pairs may experience volatility at any time due to sudden changes in interest rates, significant economic outlook shifts, or unstable political conditions.
Monetary Policy
Central banks' decisions can significantly impact currency movements. For example, a change in a nation's interest rate may affect a currency pair's appreciation or depreciation. The value of a country's currency can go up when a central bank raises interest rates, while the value might go down when interest rates are lowered.
Best Time For Trading Forex
The foreign exchange markets operate around the clock during the week (except the holidays). The market isn't controlled by one market, though. Instead, there is an international network of banks. brokers and exchanges. The Forex trading hours are determined by the country-specific market opening times. The four main trading sessions are as follows:
- Tokyo trading session
- London trading session
- Sydney trading session
- New York trading session
Experienced traders believe that the power, trend, and retracement are at their strongest during the opening three hours of a major trading session.
The London session is the most active trading period in the forex market. The currency market is open from three in the morning till noon. According to the BIS report, the U.K. session generates 43% of all trading.
The second-largest is the New York session. It is open from 8:00 am to 5:00 pm Eastern Standard Time. The US dollar accounts for 90% of all deals, making this session the most preferred among overseas investors.
Most traders agree that the best time to trade forex is the overlap of the New York and London Trading sessions.
Summary
The best pair to trade is the one you are most knowledgeable and informed about.
Here are some tips you should keep note of:
- If you're just starting out in forex trading, stick with liquid currency pairs like the EUR/USD or the USD/JPY.
- Once you know what influences the movement of currency pairings, understand the technical and fundamental factors. Pick the optimal trading time frame based on your requirements.
- You can try any trading strategy you want. It depends on your personal preference.
