Here’s what you need to know
Forex trading has long been a popular choice for online traders. It is relatively easy to set up an account with an online broker and get started with trading currencies. The barrier to entry is low, with many brokers allowing you to get started with a minimum deposit of just $100 or even less. If you’re a new or inexperienced forex trader, you might be wondering which currency pairs to trade in order to get a solid return on your investment.
How do currency pairs work?
When it comes to trading currency pairs, you are effectively looking at the value of one currency against another. Each pair includes a base currency and a quote currency (also known as a secondary or counter currency), and the first currency mentioned is the base currency. So, when you are trading USD/EUR, the US dollar is the base currency, and when you are trading EUR/USD, the euro is the base currency. The price of a currency represents how much of the quote currency you need to buy one unit of the base currency.
Majors, minors and exotics
As you venture into the world of forex trading, you will start to hear people talking about major pairs, minor pairs and exotic pairs. Major currencies include commonly traded currencies such as the euro, the British pound, the Canadian dollar and the Japanese yen. A major currency pair is a pair that contains one of these currencies and the US dollar. Minor currency pairs include any two of the major currencies apart from the US dollar.
Exotic currencies are less frequently traded currencies such as the Norwegian krone, the Mexican peso and the Thai baht. Exotic pairs include one of these currencies and one major currency. When trading through a broker, you will generally find that major pairs have the lowest spreads, making them cheaper to trade, while exotic pairs have higher spreads. This makes them more expensive to trade. However, exotic currencies can be highly volatile, allowing for significant potential profits for those who understand them.
The almighty dollar
Even if you’re just starting to learn how to trade currency online, you will no doubt be aware that the US dollar (USD) is the most popular and commonly traded currency in the world. This leads many forex traders to think that the USD is a solid investment. This is often true, of course, but the forex market is very complex, and to ensure profitable returns, it is helpful to monitor the price movements of many currencies against each other and predict how those prices will behave in the near future.
Major world events such as changes in interest rates, trade deals, and the overall health of national economies can cause the value of currencies to rise and fall, sometimes quite drastically, within a fairly short time period. Those making significant profits on the forex markets are monitoring these changes and buying and selling those currencies accordingly. Trading major currencies that include the US dollar is how most forex traders start out, but those making a lot of money are sometimes experimenting with minor and exotic pairs.
The most frequently traded currencies
Some of the most frequently traded currencies in the world right now are:
- US dollar (USD)
- Euro (EUR)
- Japanese yen (JPY)
- British pound (GBP)
- Canadian dollar (CAD)
- Swiss franc (CHF)
- Australian dollar (AUD)
Some of the most popular pairs to trade include:
Which currency is the most profitable?
It probably won’t surprise you to know that there is no simple answer to this question. Traders make profitable trades by trading all kinds of pairs, and they do so with a mixture of careful fundamental and technical analysis, excellent risk management, in-depth knowledge, and a little luck. A deep level of knowledge of a particular country or region, perhaps because they live there, means that some traders profit on, for example, trading an exotic pair that other traders would not have considered.
A lot will also depend on your trading strategies. Scalpers prefer stable pairs with a high trading volume that move slowly in the market, so they tend to stick to major pairs or the more stable minors. Traders with a high appetite for risk like to trade more volatile pairs – usually minors and exotics – that are riskier but also carry the potential for quick profit taking. Ultimately, the currency pairs you trade will depend on you, your appetite for risk, and your trading techniques.