The roots of traditional stock markets can be traced back centuries, but the foreign exchange market – Forex – is a comparatively new concept. Fundamentally, it is all about people getting a financial benefit by converting one currency to another. The modern form of Forex emerged after the Bretton Woods accord of 1971, where major currencies of the world were allowed to float freely and be traded against one another. Since the values pegged to individual currencies vary, the need has arisen for foreign exchange trading and services.
The bulk of the trading in Forex markets is carried out by commercial and investment banks on behalf of their clients. However, individual and professional investors cash in on speculative opportunities by trading in a pair of currencies.
The Forex market is where the currencies are traded. A unique feature of this market is that unlike stock markets, a central marketplace does not exist for foreign exchange. Instead, the trading in currency is carried out electronically over-the-counter (OTC). All transactions in Forex are done between traders the world over through computer networks rather than a centralized exchange.
The Forex market is open round the clock five and a half days every week. The major Forex markets globally are based in London, Frankfurt, New York, Tokyo, Zurich, Singapore, Hong Kong, Sydney, and Paris. Hence, cutting across time zones, when the Forex markets close in the USA, those in Tokyo or Singapore are starting the day. Forex traders, therefore, have to be vigilant at all times as price quotes can swing wildly between currency pairs at any time of the day or night in any Forex center.
Forex trading by individuals, corporations, and institutions takes place in three ways.
- The Spot Market – Current prices determine the selling and buying of currencies. This price is based on several factors – the current economic scenario, interest rates, future potential performance of a currency pair, and even ongoing political situations that reflect a country’s stability. Trades in the spot markets take two days for settlement.
- The Forwards Market – Two parties buy and sell contracts OTC and the terms of the agreement are decided by them.
- The Futures Market – Futures contracts are bought and sold according to settlement date and standard size on public commodities markets. In the USA, for example, the futures markets are regulated by the National Futures Association. The exchange helps the trader in clearance and settlement.
Some of the Forex market’s most common terms are FX, foreign-exchange market, Forex, and currency market, even the latest forex news websites also use these terms.
What is Trading in Forex Pairs?
Forex brokers always trade in pairs, a base currency, and a quote currency. When one currency is bought or sold, another in the pair is automatically bought or sold. The base currency is seen first with the quote currency to the right. The price shown for the currency pair is the amount for the quote currency to buy one unit of the base currency. For example, taking the EUR/USD currency pair, the US Dollar is the quote currency, and the EUR the base currency, and if the quoted price is 1.2000, it means that the EURO is trading at 1.20 US dollars.
Taking a broad perspective, Forex pairs can be put into three categories.
- Major currencies are traded on the markets. There are several options, but the inclusions on most lists are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
- Commodity currencies are currency pairs having values closely linked to a commodity such as coal, oil, iron, or other metals. Among the top currency pairs in this section are AUD/USD and USD/CAD.
- Cross currencies are the pairs that do not have the US Dollar. Two very popular cross currency pairs are the EUR/GBP and EUR/JPY.
The decision on the best Forex pair to trade is not easy. Many factors have to be considered, like trading strategy, volatility, and the complexities of forecasting the outcomes to avoid the risk of losing money.
Though there are many Forex pairs, traders do not prefer to take the high risk in the markets and play safe with EUR/USD and GBP/USD, the most traded Forex pairs in the world. One may wonder about the price fluctuations and other aspects that the top Forex pairs take into consideration.
Most Popular Forex Pairs
The most popular Forex pairs are generally those that include the US Dollar. Retail investor accounts come with a high risk sometimes when trading, and hence trading conditions are favorable with currencies of developed countries. More than 70% of the turnover of the Forex market comprises the pairs EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CHF, and USD/CAD. These are characterized by global popularity, the least risk of losing your money, and the liquidity of transactions.
- EUR/USD – This is the most traded currency globally in terms of lowest spread, popularity, and highest trading volumes. It is also the most liquid Forex pair and comprises one-third by volume of all Forex transactions, mainly fallout of the scale and transparency of the economies of the USA and the European Union countries. Investors in EURUSD can increase their investments rapidly due to leverage provided by the universally high values and strengths of these currencies. Due to the liquidity, EURUSD is one of the most predictable Forex pairs and allows trading not only in the spot market but also in derivatives like options, futures, and to understand how CFDs work. CFDs are complex instruments, so this is a critical factor to trade in EUR/USD.
- USD/JPY – This is the most popular currency in Asian trading sessions and is a strong competitor to the EUR/USD pair. USD/JPY (US dollar/Japanese yen) is the second popular currency pair and the level of liquidity in Forex. About 17% of transactions in Forex take place on this pair.
There are several benefits to this pair
- Favorable terms and conditions as the US Dollar / Japanese Yen pair are in the top three brackets of liquid Forex instruments thanks to the Federal Reserve’s robust policies and the Bank of Japan.
- Due to its high liquidity, it is easy to predict price dynamics through detailed technical analysis.
- The price dynamics of USD/JPY are based on important economic parameters.
- The US Dollar/Japanese Yen pair is among the most volatile instruments globally, and the wide range of price fluctuations offers good money to professional traders. But as a beginner, you have to consider whether you understand the dynamics of handling these massive fluctuations.
- GBP/USD – This pair is the third level of liquidity of Forex currency pairs and accounts for about 12% of the market. The British pound/US dollar pair is characterized by instability of prices and high volatility. Hence, it is a prevalent option and the currency most traded by professional investors who deploy short-term very aggressive strategies. The quotes of the British pound/US dollar pair are sensitive to statistical data on the British economy’s state and the interest rates of the Bank of England and data from the USA. This pair is handy for medium and long-term investments and is one of the best currency pairs to trade-in.
- AUD/USD and USD/CAD – These pairs have less liquidity and are good for those who can afford to take a chance of losing your money in the short term but making up in the long run. They are held as commodity pairs as their prices are closely linked with that of gold and oil. In particular, Australia is one of the largest gold producing countries globally, and the price of the AUD/USD depends mainly on gold prices. Similarly, Canada being a major oil-producing nation, CAD/USD trading conditions are linked to the prevailing oil prices.
By far, these are the most popular and best Forex pairs in the currency market in the world.
Tips for Trading Currency Pairs
Before you start on your journey of Forex pairs to trade, it is necessary to know the intricacies of trading and pick up a few tips so that you can reduce the chances of a high risk of losing. Once your goals are set, define the currency trading patterns so that you can avoid the usual outcome where beginner retail investor accounts lose a lot of money in trading.
Here are a few tips to guide you in this regard.
- Define trading style and Forex pairs to trade – Different currency pairs trading have separate risk profiles and based on this, you have to take a stand on your attitude and approach to Forex trading. For example, if you want to opt for a long-term appreciation of funds, you should be more of a currency pair position trader. On the other hand, if you do not like to keep an open position pending at day-end in traded currency pairs, you should consider day trading. Losing money rapidly due to personality mismatch is not uncommon in currency pairs trading.
- Choose a reputed trading platform and broker – It will pay in the long run if you spend some time researching each broker’s policies and services how they go about identifying bid price and calculating ask price. Ensure that the platform is good for the level of analysis that you want to do to prevent your accounts from losing money in the long run. To be successful in currency trading, make sure that you get the services of both a good platform where you can get practice on a demo account and a good broker.
- Identify Entry and Exit Levels – Many traders in currency pairs get confused by the range of conflicting information derived from charts of different time zones. You have to master this aspect if you have to deal with complex instruments and come out a winner. What could show up on a weekly chart as a buying option could transform into a sell order on an intraday chart. Hence during, say, EUR GBP currency pair trading, if you are using a daily chart for entry and doing basic trading from a weekly chart, ensure that the two are synchronized. In a nutshell, if one chart is giving the buy signal, wait for the other to similarly follow before deciding on Forex pairs to trade.
To prevent investors’ accounts from losing money, follow these tips on a traded currency pair of your choice, regardless of whether it is the Australian dollar, Swiss Franc, or US dollar. Ensure that you have a good idea of Forex trades and thereby get around the high risk of losing money. Focus on tried and tested major currency pairs to trade to be on the positive side of currency pairs trading.
What are the Best Pairs to Trade Today?
The best pairs to trade today are those linked to the US dollar, the Euro, the Australian dollar, and in the cross-currency pairs group, the Swiss Franc and the Japanese yen. Among the other top and major currency pairs where there is less possibility of investor accounts lose money are the USD/CNY, USD/CHF, USD/HKD, EUR/GBP, and the USD/KRW. As the figures show, the dollar occupies a stellar position amongst Forex traders, and these pairs are the leaders among the traded currency pairs.
Summing up, trading in a currency pair and being successful depends greatly on the chosen traded currency pair. Traders generally opt for the US dollar reserve currency as it constitutes a large part of the traded currency pairs market. When you start to trade and take up Forex trading seriously, going through this post’s information will surely help you find your feet in currency pair Forex trading.
Which Forex pairs pay the most?
The most paying traded currency pairs are the Euro / US Dollar, US Dollar/Japanese Yen, and British Pound/US Dollar. Notice that these are dominated by the US dollar. This is because trade in them is very volatile, and the fluctuations offer good money to professionals. Beginner traders should go about trade cautiously.
What are the 8 major Forex pairs?
The 8 major currency pairs for traders are EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CHF, USD/CAD, and EURO/GBP. Most are concerned with the US Dollar.
What are the 7 major currency pairs?
The 7 major currency pairs for traders are EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD, USD/CHF, and USD/CAD.
What are the most liquid Forex pairs?
Liquidity means that the assets can be sold quickly at a price that is closest to that prevailing in the market. Today, the most liquid Forex pairs are the EUR/USD having 28% of the total transaction volume, USD/JPY (13%), GBP/USD (11%).