How to Choose a Currency Pair for Forex Trading

How to Choose a Currency Pair for Forex Trading

The Forex dashboard is formed by all the products offered by the broker and available to trade. One can find Forex currencies, but also indices, commodities, contracts for difference (CFDs), bonds, etc. Each brokerage house has its own offering, this being one of the things that differentiate the numerous brokers in competition to attract as many retail traders as possible.

A Forex broker, obviously, focuses on Forex currencies, in the sense that these are the primordial markets in its offering. It tries to bring the best offers from one or more liquidity providers so that the Forex currency pairs displayed on traders’ platforms will show the best possible trading conditions at any given time during the trading day.

What Are Currency Pairs?

As the name suggests, a currency pair is formed of two different currencies “paired” against each other. Typically, each country has its own currency (some countries form a union and may share a currency – e.g., Euro and the Eurozone or some countries have their own currency pegged to a different one – e.g., Ecuador and the U.S. Dollar).

The pillar of the Forex dashboard is the world’s reserve currency – the U.S. dollar. Any currency pair that has the U.S. dollar in its componence is called a major pair. The rest are crosses. Therefore, all the currency pairs present in the Forex dashboard are either majors or crosses.

How to Pick Forex Currencies to Trade

Many traders consider that by comparing the economic performance of a country (e.g., GDP, inflation, unemployment rate, exports vs. imports, trade balance) with another country under the same metric, the opportunity to speculate arises. For instance, consider the EURUSD pair. If the Eurozone economy is forecasted to shrink 1% next year and the U.S. economy to expand by 1%, the currency pair should reflect that difference – the EURUSD pair will move to the downside.

Spreads on Different Forex Currency Pairs

For each currency pair, Forex brokers offer two prices available for traders – the bid and ask price. From the bid price, one may only sell, whereas, from the ask price, one can only buy.

Imagine you believe the Japanese Yen (JPY) will strengthen against the U.S. Dollar (USD). This translates into a potential USDJPY pair move lower. Hence, you’ll want to sell the USDJPY to profit from the move – to do that, you can only use the bid price. If the pair did move in your favor and you want to book the profit, when closing the short trade, the trading platform squares the original position by using the ask price.

The difference between the prices is called a spread. They differ from currency pairs to currency pairs, from majors to crosses, and from a trading session to another.

Trendiness

Not all currency pairs move in a similar fashion. Some spend most of the time in tight ranges, and some other ones often move in strong trends.

Depending on the trading style, traders must choose what currency pair suits the most. For example, a cross pair that tends to spend a lot of time in ranges will suit a trading strategy based on buying oversold and selling overbought levels using an oscillator. Or, a trading system based on moving averages or a different trend indicator will benefit the most from a currency pair that often move in strong trends.

Trading Sessions

The Forex market only stops over the weekend. For this reason, it is said that it moves “with the Sun.” Trading begins in Asia, moves to Europe and ends in America. And then the cycle starts again.

In each session (Asian, European, American), trading conditions have certain particularities. For instance, the EURUSD is most likely to spend time in tight ranges during the Asian session but suddenly becomes more active during the European and American sessions – especially if there’s an economic data coming out in one or both trading sessions.

What is the Best Currency to Trade in Forex?

There’s no such thing as the best currency to trade in Forex. It depends on many factors – the trading strategy, the trading style (swing trading, scalping, investing), the time horizon for a trade, and so on.

Forex currency pairs are unique markets. Each pair represents a market on its own, with particularities that may or may not appear in some other markets.

EURUSD – One of the Most Important Forex Major Pairs

A major pair because of the USD presence, the EURUSD is the most popular Forex currencies part of the Forex dashboard. Because it has the tightest spread when compared with all other currency pairs, many traders favor it due to its low impact on the trading costs. The pair also has  a decent average range, it trends a lot and is liquid enough to buy or sell any volume, regardless of how big it is.

How to Choose a Currency Pair for Forex Trading

USDJPY

Another major with tight spreads, the USDJPY is strongly correlated with the global equity markets, particularly with the United States equity indices – S&P500, DJIA. Because the interest rate on the JPY is one of the lowest in the world, investors wishing to buy equities borrow in JPY and then purchase USD to pay for the stocks.

The move translates in a bullish USDJPY move, similarly to the one made by the U.S. indices. Naturally, the process reverses when a risk-off move begins, with investors selling stocks to cover the JPY loans.

GBPUSD

A very liquid currency pair, the GBPUSD is also called “cable” after a physical cable was first laid down on the bottom of the ocean to connect the two most important financial centers in the world – London and New York.

While having a wider spread than the EURUSD and USDJPY, it compensates with the distance traveled and liquidity. Literally, it is suitable for any type of strategy.

USDCHF

The Swiss Franc (CHF) is viewed by market participants as a safe-haven currency. It means that during risk-off events, investors find refuge in the CHF, sending the USDCHF pair lower. Conversely, when there’s a risk-on event, the pair is bullish.

The CHF is often the subject of its own central bank’s interventions. The Swiss National Bank (SNB) is a central bank like no other, making no secret the fact that it often intervenes to stop the CHF appreciation. Moreover, the SNB is a private entity, having shares listed on the Swiss stock exchange.

AUDUSD

The Australian Dollar (AUD) is strongly correlated with the price of commodities such as gold, copper, etc. Because Australia is a big exporter of such commodities, its value rises and falls when gold, for instance, changes its value.

The AUDUSD pair, also called the Aussie pair, depends on the health of the Chinese economy. Australia is an exporter to China, and the Chinese business cycle strongly influences the way the AUDUSD moves.

USDCAD

Because the two countries (i.e., United States and Canada) share the same border, the Canadian economy depends on the economic events in the United States. Also, because Canada is a big oil producer, the value of its currency, the Canadian Dollar (CAD), is influenced by the oil price fluctuations. The USDCAD is less liquid, especially during the Asian session, having wider spreads when compared with other currency pairs.

How to Choose a Currency Pair for Forex Trading

NZDUSD

Also called the Kiwi pair, the NZDUSD reflects the differences between the United States and New Zealand’s economies. It is a special currency pair due to the low margin needed to trade it. For this reason, it attracts traders as there’s more available margin after opening positions on the Kiwi pair.

Conclusion

To make the most of the currency market and the way currency pairs move, please visit FXOpen and check the trading conditions offered. After opening a trading account, you’ll find all currency pairs discussed in this article with one of the best trading conditions for retail traders anywhere in the world.

 

How useful was this post?

Click on a star to rate it!

Average rating / 5. Vote count:

No votes so far! Be the first to rate this post.

We are sorry that this post was not useful for you!

Let us improve this post!

Tell us how we can improve this post?

with No Comments 1416
Scroll Up