The forex market is one of the most popular and continuously growing financial trading platforms that many people across the globe use. Over the past decades, its popularity and market demand have increased, and it has now become a global and accessible trading market. Because of its appeal, anyone can now trade in the forex market using their smartphones, tablets, or laptops.
One of the unique things about the Forex market is what you trade in it. Currencies are the assets you buy, trade, or sell in forex. They are also the reason forex is a highly volatile market. Every day, currency rates rise and fall, depending on a country’s economic factors. If you’re familiar with forex, you know you trade currencies in pairs.
Currency pairs in forex
In forex, the market gives quotation prices for two currencies you trade. Since the currency exchange is ever-changing, the currency pairs float or change along with the market’s conditions. Two currencies determine the rates of what you trade, buy, or sell in the market. They are the base and quote currencies.
The base, also called the transaction currency, is the currency that appears first in a pair. For example, if you’re trading USD/JPY, the U.S. Dollar is your base currency. The Japanese Yen, on the other hand, is your quote currency. Your base currency simply tells you the rate of the quote currency you need to get one unit of the base currency.
Here’s another example. Let’s say the currency pair EUR/USD is equivalent to 1.3000. In this pair, your base currency is EUR meaning you can exchange one euro for 1.3000 U.S. dollars. In simpler terms, you can trade 1 euro for 1.3 U.S. dollars. In buying terms, you’ll need to pay $130 for €100.
The best-performing currency pairs in the forex market
Most people know that the strongest currency in the world is the U.S. dollar. One of the reasons it has become the strongest currency is the stability of its economy and government. That’s why when the economy of the U.S. government changes, it also affects the economy of developing countries, especially third-world ones.
Did you know that the United States of America is responsible for more than 30% of the world’s economy? That is why the country is the biggest market in the world. In the forex market, you can trade any currency pair you want. But most top-performing currency pairs with proven performance in the market always have the U.S. dollar.
According to Forbes, the following are the major pairs that are responsible for the majority of the trading activity in the market:
- EUR/USD (Euro/U.S. Dollar)
- USD/JPY (U.S. Dollar/Japanese Yen)
- GBP/USD (British Pound Sterling/U.S. Dollar)
- AUD/USD (Australian Dollar/U.S. Dollar)
- USD/CAD (U.S. Dollar/Canadian Dollar)
- USD/CHF (U.S. Dollar/Swiss Franc)
- NZD/USD (New Zeland Dollar/U.S Dollar)
As we can see, the U.S. Dollar is a pair with every other currency on the list. It makes perfect sense and is no news since it’s the strongest currency in the world. Likewise, the other currencies on the list are undeniably substantial and have proven records in the market. Starting with these currency pairs is best if you plan to trade forex. After all, they’re the ones professional traders recommend.
Major, minor, and exotic pairs
The currency pairs on my list above are the major pairs. You can identify a major currency pair because it always has the U.S. dollar in the pair. On the other hand, minor currency pairs don’t have the U.S. dollar in the pair but have currencies from top-performing countries like EUR/GBP, EUR/AUD, and GBP/JPY.
Minor currency pairs’ volatility rates are higher than major pairs, but they have stable performance in trading. Lastly, we have exotic pairs or pairs that have a major currency with a pair from a developing country’s currency. An example of exotic pair is JPY/NOK or Japanese Yen/Norwegian Krone. The volatility rates of exotic pairs are the highest and have higher spreads.
Tips for choosing currency trading pairs
Professional traders say that your choice of currency pairs affects your trading journey’s overall performance. In the forex market, you must constantly learn, research, and develop a plan to help you strategise and make the most out of your trading. But as I mentioned earlier, the market is highly volatile and could change within a blink of an eye.
That’s why it’s critical to trade currency pairs that would help you have a successful trading journey. Here are some tips for choosing the best currency pairs that could help you earn a profit when you trade them using your strategic plans.
1 – Review and know the volatility rate of the pair you’re considering
By now, you already likely understand that the value of the currency pair you’re trading can either earn you a profit or lose your initial payment. Even though the forex market is peculiar and highly volatile, a currency pair’s past trends can help you predict its future performance.
You can start by monitoring its performance for the last three to six months. Understanding its trend from the previous months will help you know the country’s economic condition. You can also review its trends from the past years. However, don’t rely solely on past years’ data since economic activity varies, especially if there’s inflation.
2 – Research the economic condition of the countries concerned in your currency pair.
A country’s economic condition affects its exchange rate. And since the forex market’s movement relies on currencies, a country’s economy plays a critical role in your trading. Most major currency pairs would perform well because their countries’ market performance tends to be liquid.
Major currency pairs also perform well because their economy’s movement is persistent. The more powerful and developed a country is, its currency’s performance will be more consistent. When choosing a currency pair, research their economic conditions first.
3 – Stay up-to-date with a country’s news events
Another factor that will help you choose the best currency pair is to stay updated with a country’s news events. Similar to the recent point I discussed, the major events that happen in a country affect its economic movement.
Every single piece of news that happens in a country determines and affects its currency’s performance in the forex market daily. That’s why before buying or selling a currency pair, be aware of a country’s latest events.
4 – Familiarise yourself with the best times to trade a currency pair
There are specific times when a currency pair is best to buy, sell or trade in the forex market. Every currency pair has a time in a day when they’re the most active, which is the ideal time to trade them. When choosing a pair, learn a pair’s trends and peak activity within a day.
Knowing this will help you make a schedule that works best for you. Also, if you have a different timezone from the currency pairs you’re trading, knowing this allows you to allocate time to trade daily.
In forex, currency pairs are relative and unpredictable, so you must be flexible.
Being a successful trader in the forex market could take a while. But understanding how currencies work and being smart with your choice of currency pairs would help. Always remember that each currency is relative to the other. And never rely on the market’s past performance alone because the market is unpredictable and could change instantly. The secret is to stay flexible and keep on learning so you’ll stay updated with the market’s changes.
About the author:
Bianca Banda writes helpful tips and educational Forex-related content for MetaTrader website. She also writes about lifestyle, business, and more.
Photo by John McArthur from Unsplash