The Forex market is one of the biggest markets in the world, offering high risk but even higher rewards to the thousands upon thousands of traders logging on every day to trade on the exchanges of different currencies around the world. When you start trading, you’re going to immediately notice the variety of different exchanges to invest in. Each currency paired with another makes its own pair and it can be overwhelming for a newcomer. So, what are the best currency pairs to trade when starting out? If that question had a simple answer, you wouldn’t have to read an article like this. We need to look more deeply into currency pairs and what exactly makes for a good trade.
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Understanding currency pairs
Currency pairs are the bread and butter of Forex. They measure the two currencies within the pair in terms of relative wealth. One currency is the base currency, and the other is the counter currency. So, when you see a value of GBP/USD 1.01, that means that the base currency (GBP, or Great British Pound) is worth 1.01 times the counter currency (USD, or US Dollar). So, a single British pound is worth $1.01. When you invest in a currency pair, you’re essentially betting that the base currency rises in value compared to the counter currency, in layman’s terms.
The majors are a term to describe the relationships revolving around the US dollar. As the world’s largest economy, the US has the most robust currency and, in general, is the reference we use to measure the strength of currency exchange transactions on the whole. Its relationship with the Euro, the Japanese yen, the British pound, the Australian dollar, Swiss franc, and Canadian dollar occupy most Forex trades. But they are not necessarily the best pairs to invest in, they just tend to have the largest fluctuations day-by-day. By and large, however, you are going to find the US dollar and the seven currencies mentioned above in most of the pairs worth trading in.
United States Dollar vs Euro
The United States Dollar vs the Euro, or USD/EUR, is one of the most widely traded currency pairs. With the lowest spread amongst most Forex Brokers, it is a good pair to trade if you’re not looking for anything too risky. As it’s not very volatile, you can set up trades with USD/EUR without worrying too much about making significant losses. Despite this, we always recommend you have a sound risk management strategy in place.
United States Dollar vs Japanese Yen
Another regularly traded pair is the United States Dollar vs the Japanese Yen, or USD/JPY. With low spreads and exceptional liquidity, it has a smooth trend that’s relatively easy to follow. It could promise to offer more substantial returns down the line, too. A large part of this is down to slow economic growth within Japan’s trading partners, which might lead to the Yen depreciating in the future. This means that the USD/JPY relationship will continue to grow only more profitable if the trend forecasts are correct.
United States Dollar vs Great British Pound
The United States Dollar vs the Great British Pound or USD/GBP has led to significant gains in the Forex majors market for some, thanks to profitable pips and broad jumps. However, this pair is also considered one of the most volatile of the majors. If you’re going to trade USD/GBP, make sure that you’re relying on plenty of market analysis information and minimise the amount of risk by implementing tactics such as using a stop loss.
About 70% of all trades on the Forex market are made using the US Dollar, the Euro, and the Japanese Yen, with the Great British pound being considered one of the more volatile currencies. The USD/GBP pair stands alone when compared to all the other major currency pairs. The majority of them are guaranteed with tight spreads except for the USD/GBP because of its volatility. Experienced traders recommend staying away from currency pairs with higher spreads and staying within the 0-3 pips range. Otherwise, a pair can get too expensive and can lead to losses well beyond the 2% daily maximum rule that a lot of traders tend to adhere to.
The most important part of trading in any pair is making sure that you have reasonable knowledge in both of the currencies and the countries the currencies come from. Paying attention to the political and economic news regarding the nation and its currency is essential. You can then start to predict how certain events may affect the value of a currency. Many of these changes will balance out, so buying and selling in exchanges is a practice best-done from day-to-day if you want to capitalise on current events as quickly as possible.
If you’re interested in learning how to analyse political and economic factors related to Forex trading, attend one of our free award-winning Forex trading workshops.
Forex isn’t just profoundly tied to the world’s economies; it also plays a role in influencing them. The better a currency pair is and the more people trading in it, the bigger the ripples it can have, especially since most countries in the world are becoming more and more interconnected. To really find the best pair to trade in at any given moment, you have to have your eye on the ball. You have to look at the political and economic situation of the country whose currency you want to invest in, as well as the shifts and changes in the market itself.
Some of the best ways to learn how currency pairs tend to play out are to use the demo accounts available on most Forex trading platforms and brokers or invest in training courses from reputable providers such as Learn to Trade. Once you know enough about the Forex market and the economic position of a country, you’re in a much stronger place to know which are the best currency pairs to trade, yourself, whether they’re the majors or not.