Forex trading is the practice of converting one currency into another, with the ultimate goal of making a profit. Basically, a trader sells a certain currency in order to buy another currency. Hence, forex trading always takes place in pairs, as there are always two different currencies in each trade.
Choosing the right currency pair is crucial to the success of your forex trading experience. It is just as important as using the right trading strategy, or finding the right broker. In this article, we will talk about currency pairs, the different factors that affect the prices of these pairs, and tips on how to choose the best forex pairs to trade.
Understanding Currency Pairs
Each country has a currency with its own value. When two currencies are paired together, the relationship between their values determines the value of the currency pair. The first currency in the pair is the base currency, while the second is the quote currency. The amount of the quote currency that is necessary to buy a unit of the base currency is the price of the currency pair.
For example, let’s take the EUR/USD currency pair. Here, EUR or euro is the base currency, and USD or the US dollar is the quote currency. So, the number of USD that you need to buy 1 EUR is the current price of the EUR/USD
Types of Currency Pairs
Technically, any two currencies are tradable in the forex market. However, there are some pairs that are more frequently and more profitably traded than others. There are also some pairs that traders are so unlikely to choose that brokers don’t bother to offer them at all. Following are the different classifications of currency pairs, which can help you figure out the best forex pairs to trade.
Major Currency Pairs
Major currency pairs get the most trade volume among all the currencies in the world. These pairs have the largest trade volume and the highest liquidity. You will notice that all seven major currency pairs include the US dollar. This is because USD is used internationally, and the US economy is also the largest globally. With that being said, the seven major currency pairs are as follows:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
- AUD/USD
- USD/CAD
Minor Currency Pairs
Minor currency pairs also get a fairly large amount of trading volume, but these pairs do not include the USD. Most of them are crosses, where the two currencies are both part of a major forex pair but are not USD. For instance, the EUR/GBP and the GBP/JPY are two of the best forex pairs to trade among the minors.
Exotic Currency Pairs
Exotic currency pairs are not nearly as liquid as majors and minors, and the spreads are quite wide. In addition, they can be extremely volatile, which means risks are higher. At the same time, this could also lead to surprisingly large profits in case the market moves in your favor. Just a few of the exotic pairs that are worth considering adding to your portfolio are USD/SGD, USD/HKD, and EUR/TRY.
Best Forex Pairs to Trade in 2024
It makes a lot of sense to assume that the best forex pairs to trade are the major pairs. While this is true, you must not always ignore the pairs that are not on the majors list. Keep in mind that there are always evolving factors that affect the profitability of various forex pairs. All things considered, here are the best forex pairs to trade these days, along with their interesting nicknames
EUR/USD
By far the most heavily traded forex pair today, the EUR/USD is also known as the Fiber. It’s not a surprise that the euro and US dollar pair tops the list, considering the massive individual sizes of the European and the US economies. By trading this pair, you can be assured of tight spreads, which is always a plus for traders.
USD/JPY
Trading the US dollar against the Japanese yen, collectively known as the Gopher, can yield potentially high earnings. Spreads are generally tight and the price trends are quite regular, making it easy for traders to time their transactions.
GBP/USD
Although it has always been a popular currency pair for forex traders, the GBP/USD has seen a lot more trade action in recent years. This is due to various economic events in the UK starting from Brexit in 2020 and the downfall of the pound in 2022 due to inflation. In any case, the Cable, which is the nickname of this pair, is definitely one of the best forex pairs to trade.
USD/CNY
Next to the US, China is the second largest economy in the world. It is therefore no surprise that the US dollar and the Chinese yuan pair are also very attractive. In addition, there is no shortage of political tension between the two countries, which adds to the volatility between the two currencies.
USD/CAD
As strong trading partners and geographical neighbors, the US and Canada have recently seen an increase in market share in the forex industry. With a nickname of Loonie, the USD/CAD pair is dependent on the price of oil, as Canada is a major oil exporter. With an increase in oil price, CAD is likely to be stronger in comparison to USD. This is a major factor that traders will have to keep an eye on.
AUD/USD
The Aussie, or the pair consisting of the Australian dollar and the US dollar, correlates strongly with commodities. The reason for this is that Australia is one of the largest exporters of iron ore and coal. Price movements in these commodities will greatly impact the AUD. Specifically, as these commodities increase in price, the AUD/USD price would increase as well.
USD/CHF
Switzerland is a safe haven for investors due to the stable financial system of the country. During times when other currencies might plummet, the Swiss franc might actually rise in value. Therefore, trading the USD/CHF or the Swissie can be a very good idea in periods of global economic turmoil.
USD/HKD
Hong Kong is not a major economy as of now, which makes the USD/HKD an exotic currency pair. Nevertheless, it now accounts for a significant volume of daily trades in the forex market. This pair is not highly volatile since the HKD is linked to the USD, but this doesn’t stop the pair from being popular, especially among swing traders.
Once you have picked from the best forex pairs to trade, the next step is to open a trading account so you can start buying and selling. If you want to test the market without risking your money, you can use the demo accounts that most forex brokers offer for free.
