The Forex market is one of the most exciting markets a trader can be involved in. The main reason behind this is the second to second fluctuation in the market. Due to this market’s general volatility, the Forex market has many opportunities for making a profit if you utilise the right strategy and choose the right currencies. If you want to trade Forex successfully, you’ll need to understand at least the basics of currency pairs. But what exactly are currency pairs? What are the best currency pairs to trade? Keep reading this handy guide to learn more.
What are Currency Pairs?
Also referred to as Forex (or FX) Pairs, currency pairs are the quoted price of the exchange rate of two different currencies traded in the Forex market. An example of a currency pair would be EUR/GBP, which refers to the Euro/Great British Pound. Currency pairs refer to one currency in relation to another, comparing the exchange rate for traders to spot changes and potential opportunities.
Handy Forex Trading Terms
To ensure your understanding of currency pairs is as strong as possible, it is important to understand key Forex trading terms that will likely come up frequently in your trades. Here are 5 of our top handy Forex trading terms:
- Bid: A bid refers to the price a dealer is willing to pay for a currency. When you sell a currency you will receive the bid price.
- Ask: The ask is the price at which the dealer will sell the currency. When you buy a currency you will pay the ask price.
- Spread: The spread is the difference between the bid and the ask price. Traders often take the spread of a currency sale as a commission.
- Pip: In trading, a pip is an acronym for “percentage in point” or “price interest point”. A PIP represents the smallest amount of change an FX pair can have in the market.
- Volatility: Volatility in the market refers to price fluctuations, some of which can be beneficial for certain types of trading strategy.
How To Choose the Best Currency Pairs to Trade
Now that you understand the basics, the key way to ensure you choose the best currency pairs to trade is to understand market behaviour. Great market analysis will determine which strategies to employ and help you choose which currencies to trade. Is the market volatile or stable? Does the market have trending behaviour? These sorts of questions will influence your choice of currencies. For example: if you are a day trader, major currencies are going to be more suitable for you. Whereas if you’re a swing trader, major/minor and exotic currency pairs might be more appropriate. It’s important to do your research beforehand. If you are a newbie Forex trader and you have no idea what currency pair to choose from, look for those that have a high average daily trading volume.
How Many Currency Pairs Should I Trade?
The best strategy in Forex trading differs depending who you ask, but the general consensus is to use several currency pairs. This way you can spread your risk across various markets, which minimises the potential damage that could be done in case you get into a losing streak. Having trades open at all times should also allow you to take advantage of major price swings and cash in on them before other traders become aware of what is happening.
As a beginner, it’s best to choose 1-2 major currency pairs and focus your efforts on learning and improving your performance trading these pairs to ensure you don’t spread yourself too thin too quickly. Ideally in the long run you can focus your efforts on 5-10 currency pairs.
The Best Currency Pairs To Trade For Day Traders
EUR/USD: The EUR/USD pair represents the amount of US dollars required to buy a single euro. This currency pair is the most traded in Forex trading, as it is made of two of the world’s strongest economies. The exchange rate here is impacted by government policies and currency market’s demand and supply for the pair. This tends to be strong as the small spread of major currencies creates a high volume of trades.
USD/JPY: The USD/JPY currency pair shows how many Japanese yen are needed to purchase one U.S. dollar. USD/JPY is the second most traded currency pair in the world and trading this pair is known as trading the ‘Gopher’. There are numerous economical factors and indicators that impact this pair’s exchange rates.
GBP/USD: GBP/USD is one of the oldest trading pairs around. Also referred to as trading the ‘Cable’, this currency pair is another one of the most popular when it comes to trading Forex. GBP/USD exchange rate is influenced by factors that impact the value of the British pound and/or the U.S. dollar in relation to each other and other currencies.
USD/CHF: One of the most common currency pairs in today’s foreign exchange market is USD/CHF, which represents a significant quota for daily trading. Both veteran traders and newcomers alike are attracted to this particular pairing due its popularity among traders from all over the world. Economic indicators from both countries, such as gross domestic product (GDP) and employment data, have a significant impact on this currency pair’s exchange rate. Trading this currency pair is also known as trading the ‘Swissy’.
AUD/USD: Trading the Australian dollar/U.S. dollar currency pair is known informally as trading the ‘Aussie’ among Forex traders. This is another of the most popular currency pairs to trade worldwide, as Australia is among the richest countries in the world when it comes to natural resources like coal, metals, diamonds, wool and meat. As Australia heavily relies on these raw material exports, this currency pair exchange rate is significantly impacted by commodity prices.
USD/CAD: Also known as trading the ‘Loonie’, the U.S. dollar and Canadian dollar are another popular currency pair in Forex trading. This is a popular pair because of the large amount of cross border trading that takes place between Canada and the U.S. The Canadian dollar is largely considered a commodity currency due to the high amount of natural resources (like oil) that are mined and exported to the U.S, meaning that this currency pair is also significantly impacted by these commodity prices.
Ready To Start Trading Forex?
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