Currency pairs are the backbone of the forex trading system, but what are they and how can you choose the right one? Probably the first chapter of forex education comprises the details of currency pairs.
So far you would be familiar with major currency pairs, minor currency pairs, cross-currency pairs, and exotic currency pairs. This post will tell you how to choose currency pairs in forex trading.
To make the right choice of currency pairs, prefer highly liquidity, less volatility, low spread, trendiness, and low-cost trading pairs. Moreover, trade during the trading session that matches your skills. For beginners, low-risk and stable currency pairs are best.
The best way is to choose pairs that are suitable for your trading strategy. In other words, trade-in currencies bring more profit for you. One more thing, consider your skill level also whether you are a beginner or advanced trader. Few pairs are not good for beginners, while they are good for advanced.
So, it depends on your level of skills in trading.
What Is Currency Pair
The major object of operation in forex is the currency pair. What is a currency pair? A currency pair refers to the difference in the price of base and quote, or the exchange rate of two different currencies traded in forex.
The first currency is named as a base and the second is the quote currency. The difference between base and quote determines the exchange rate of that currency pair. For example, in EUR/USD the difference between base and quote is 1.21, which means 1 EUR costs 1.21USD.
If you are a beginner, we have a detailed article about the best currency pairs to trade for beginners.
7 Criteria for Choosing Currency Pairs in Forex
For beginners, choosing currency pairs can be confusing. The reason for this confusion might be the sheer number of pairs available in forex. Every currency pair is unique in a sense. And choosing volatile currency pairs can increase the profitability of the trading results.
You should choose those currency pairs that fit well with your trading strategy and bring more profit.
Below are 7 criteria you should consider for currency pair selection:
1. Consider Liquidity
Though some traders neglect the liquidy factor as the thing market is always highly liquid. They think there is always a demand and supply chain in the market. So, they overlook this aspect.
But I think for newbies liquidity is the primary motive to consider. If liquidity is higher, volatility will be lower. In turn, brokers will offer a low spread. This can bring down your trading volume.
Major currency pairs are thought to be highly liquid in the forex market. Among them, USD pairs contribute 88% of the widely traded pairs in the world.
Below are 4 top traded highly liquid currencies that you can choose from:
2. Consider Spread
Spread is another parameter that can impact your choice. It is mainly the difference between the bid- price and asks the price of the currency pairs. Most traders choose currencies with a tight spread in forex.
If the spread is lesser, traders tend to make more profit. For example, the spread of EUR/USD is 2 to 3 pips for most brokers, while GBP/JPY has a spread of about 6 to 10 pips for brokers.
A smart trader will always choose EUD/USD because of tight or low spread. Such currencies bring more profit in case of price fluctuation.
Broker choice is also a vital issue about the spread. Usually, a low spread broker like ICMarkets can provide accurate trading results for the clients.
Table of spread/daily range of low Spread Currency Pairs
|Currency Pairs||Spread /Daily Range|
3. Consider Volatility
Liquidity or trading volume is inversely proportional to volatility. The higher the liquidity, the lower will be the volatility of that currency pair in the forex market. One of the biggest mistakes that Beginner traders make when choosing a currency pair is to choose high volatile pair.
Such pairs have a high-risk ratio. As a beginner, you are not in a position to risk your money. So, always go on with minor currency pairs unless you learn risk management skills. But expert full-time traders and swing traders can go on with high volatile pairs.
Minor currency pairs are less volatile as they are low traded pairs and more stable because of political and economic conditions.
Below are the less volatile currency pairs for beginners to trade:
4. Consider Trendiness
Though most of the traders rely on volatility to choose currencies. But I think like a trader we should never neglect the more trendy pairs. One of the biggest mistakes that traders often do is that they stuck to one pair and neglect the trends and potentials of making money from others.
Despite volatility factors, fewer pairs show high trends than others. You can use indicators and other charts to check on your small window which pair is the most trending in the future.
It’s right to think of volatility as the main parameter but you will have to be more cautious as it’s highly risky. You will have to put more stop loss when trading with GBP/USD. With forex indicators, you can pinpoint which pair is the trendiest one to trade with.
5. Consider Trade Cost
The cost of trade is similar to what you may call spread. This includes the commission fees of brokers and the average rate per pip you trade. Central banks allow registered brokers to earn a limited amount as commission fees.
But if your broker charging more on certain currency pairs, you should never choose those pairs. Sometimes it is noted that brokers add extra pips to increase commission when you are long-term traders. This is a common broker scam.
They do it when you hang on trading during sleeping hours or at night. So, beware of any tactics that brokers can use to cheat you.
6. Consider Trading Session
For short term or day traders, trading session matters a lot. The best time to trade forex is when the market is highly active with the biggest trading volume. This time zone is different for different continents.
For Asian traders, the best trading hours are when Tokyo opens from 7 PM EST to 10 PM EST. The most active currency pairs in the early morning according to Asian trading sessions are USD/JPY, AUD/USD, and NZD/USD
However, when the London market opens, you can trade all currency pairs. It’s up to you to choose the pairs keeping in view the trendiness and trading session.
7. Consider Your Level of Trading
Your level of skills matters a lot. If you are a beginner you should never try high volatile pairs not least volatile pairs. Similarly, advanced traders who trade with big capitals can trade easily with high volatile pairs. You should pick up the pair after deciding what type of trader you are.
If you are a swing trader you should follow more trendy pairs. If you are a full-time trader, you can trade with any currency pair you feel good with. So, decide your level as well as your trading type before choosing currencies.
Frequently Asked Questions (FAQs)
Which currency pair is most profitable in forex?
In forex trading, EUR/USD, GBP/USD, and USD/JPY are considered highly profitable pairs. The reason is that they move more pips, have low spread and high trading volume. They are popular all over the world and made 88% of total trading volume in 3 to 6 months.
How many currency pairs should I trade?
Generally, new traders work on one or two currency pairs. Good advice is to choose EUR/USD, USD/JPY as their resources are widely available online. They are popular pairs and the easiest pairs to trade on.
How do you know which currency pairs are trending?
Technical analysis is essential to know which currency pair is trending. The simple rule of thumb is that when major currency pairs such as (EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CAD, USD/CHF, and NZD/USD) are always trendy, stick to them.
When they are restricted, focus on cross currency pairs GBP/JPY, EUR/JPY, EUR/CHF, EUR/GBP, AUD/JPY, EUR/AUD, etc.
This post is a complete guide on how to choose currency pairs for trading. Now you can understand that traders often rely on only one pair. In this way, they tend to ignore the many profitable opportunities of other currency pairs.
Your selection matters a lot. I would suggest always go on with pairs that you acknowledge most. When you feel comfortable with any particular pair, it’s good to stick with it.
But keep eye on what’s going on with other currencies in the market. Maybe you are missing many chances to win.
Which pair is your favorite? Tell us in the comment box. We’ll love to share your friendly pair story on our website. Bye for now! Good luck!