How to choose the best currency pair when forex trading
The foreign exchange (forex) market is classed as one of the largest financial markets in the world, due to the sheer volume of trade it sees each and every day — an average of $6 trillion worth of trading.
As one of the most popular financial markets, the forex market also experiences high levels of volatility and liquidity, which provides opportunity to profit from currency fluctuations.
There are many ways traders can access the market. One way is through futures contracts, where the assets are bought at a predetermined price, at a set date in the future. Forex can also be traded through contracts for difference (CFDs) — a financial derivative favoured by experienced traders to diversify their portfolio.
Through an online CFD trading platform, traders can speculate on the price movement of the most popular currency pairs, without owning the underlying asset itself. It allows traders to take positions on both a falling and rising forex market.
Whichever trading strategy you choose, as a forex trading beginner, it’s important to conduct extensive research before entering a trade. You should understand about currency pairs, how they work, and how to choose the right one for your trading style.
Read on to find out more.
How to read currency pairs
On the forex market, currencies are represented by codes defined by the International Organization for Standardization (IOS). For example, the USD code stands for the US dollar, combining the name of the country and its currency. Likewise, the Great British pound is represented by the code GBP, and the Japanese yen by the code JPY.
Currencies are also traded in pairs, with their value and exchange rate based on the comparison between the two. A currency pair is made up of a base currency, and a quote currency (sometimes known as the counter currency). When forex trading, you would buy in the base currency and sell in the quote currency.
For example, with the currency pair of the pound and US dollar (GBP/USD), you would be buying in dollars and selling in pounds.
Most popular currency pairs
As a global financial market, forex trading can involve currencies from across the globe. With so many currencies available to trade, they are separated into three categories:
- Major
These are the most commonly traded currency pairs, and comprise of the US dollar and one of the following currencies: JPY, GBP, Canadian dollar (CAD), Euro (EUR), or Swiss Franc (CHF). Due to their popularity, the USD is often referred to as the world’s base currency amongst traders.
- Minor
These currency pairs do not involve the USD, but include other widely-traded currencies from important economies, such as the EUR/GBP. There are 42 pairs classed as minor on the forex market, and although they make up a smaller portion of the market, minor pairs can experience a significant level of liquidity.
- Exotic
Exotic currency pairs involve currencies that are less liquid, from countries with emerging economies. They can involve a pair with a major currency, or two exotic currencies. They are the least frequently traded currency pairs
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If you are new to forex trading, it’s often recommended to begin with major forex pairs, as these tend to be more stable and liquid in nature. Additionally, they will usually involve your domestic currency, where you can benefit from any prior knowledge of the currency and the factors that can affect it.
Creating a trading strategy
Once you have researched the forex market and decided which currency pair you want to focus on, then it’s a good idea to try and test your trading techniques on a free demo trading account.
Most online trading platforms give you the option to trial a demo account, reflective of the real underlying market, so you can fully understand how it works. Once you feel ready, you can then take the step into forex trading with real capital.