Entering the forex market is like walking into a huge global bazaar with infinite choices. There are over a hundred currency pairs, and when traders first enter the market one of the first and most important decisions we have to ask is “Which pairs do I trade?” It’s easy to become overwhelmed with so many options, taking the time to narrow your trading pairs down is essential for having an adequate focus and effective trading plan.
Picking the right pair is not about a secret formula, it is about understanding your individual trading style, your risk tolerance and what you want to achieve. The best forex currency pairs for a scalper trading in short timeframes will be completely different from a position trader who is going to hold for weeks or months.
In this guide, you will be provided with an overview of the categories of currency pairs, some of their individual characteristics and a defined process to help you identify the best forex currency pairs on your journey to becoming an informed and successful trader.
The Three Families of Forex Pairs
To simplify the vast forex market, currency pairs are generally grouped into three main categories: the Majors, the Minors, and the Exotics. Understanding the differences between them is fundamental to making informed trading decisions.
1. The Majors: The Titans of the Forex Market
The “major currency pairs” are the kings of the currency trading world. In short, the major currency pairs are the most traded forex pairs in the world and always have the U.S. Dollar (USD) on one side of the transaction. These are well traded currency pairs with other major global currency pairs like Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD), and New Zealand Dollar (NZD).
Examples of Major Currency Pairs:
- EUR/USD (The Euro / U.S. Dollar)
- USD/JPY (The U.S. Dollar / Japanese Yen)
- GBP/USD (The British Pound / U.S. Dollar)
- USD/CHF (The U.S. Dollar / Swiss Franc)
Key Characteristics:
- High Liquidity: These currencies have very high volumes for trade every day, which means you can enter and exit positions easily.
- Low Spreads: The trading volume among them is so high, the spread (the difference between the buy/sell price) is very low, this helps to reduce your costs of trading.
- Predictability: These currencies tend to behave more predictably in regards to technical and/ou fundamental analysis than any other pair.
For those just starting out, the major currency pairs are usually suggested as the best place to start. They are consistent and inexpensive, which means these are the best forex currency pairs for beginners to learn with. Well known brokers, such as Capitalix and SmartSTP typically offer the tightest spread on these major currency pairs, which makes them even more appealing to active traders.
2. The Minors: The Cross-Currency Contenders
Minor forex pairs, or cross-currency pairs, in which they both involve major world currency, but do not involve trading USD. This is essentially trading two major currencies in relation to each other.
For example:
- EUR/GBP (The Euro / British Pound)
- EUR/JPY (The Euro / Japanese Yen)
- AUD/CAD (The Australian Dollar / Canadian Dollar)
You can expect a few characteristics about minor forex trading that are similar to major trading pairs.
- Reasonable Liquidity: They will not be as liquid as the major pairs; however, trading volume is still decent.
- Slightly wider Spreads: Your cost of trading minor forex pairs will be a little higher than the major forex pairs.
- Unique opportunities: Minor forex pairs also give traders a unique opportunity to take a view on the relative strength of two economies without trading through the USD. For example, trading EUR/GBP is a direct play on the Eurozone economy v UK economy.
Minor forex pairs can be an interesting way to diversify your strategy. FX Road and Trade EU Global are platforms that excel at minor forex trading, as they offer a good selection of crosses with reliable execution and tons of various choices that allow traders options to find the best forex currency pairs for their analysis.
3. The Exotics: The High-Risk, High-Reward Players
These pairs consist of one major currency (like the USD or EUR) paired with the currency of a smaller or emerging economy.
Examples of Exotic Pairs Forex:
- USD/TRY (U.S. Dollar / Turkish Lira)
- EUR/ZAR (Euro / South African Rand)
- USD/MXN (U.S. Dollar / Mexican Peso)
Key Characteristics:
- Low Liquidity: There are significantly fewer market participants who trade these pairs which can make it difficult to trade at the preferred price.
- High Volatility: Exotic currency pairs are subject to extreme and sudden price changes due to economic and political instability.
- Wide Spreads: The trading costs of exotic pairs forex can be incredibly high.
Exotic pairs forex should best be left to experienced traders who have a firm understanding of the risk of trading these pairs. For the experienced trader exotic pairs forex can have the potential for high profits, especially over very short time frames. It is important to have a broker that offers a solid platform for this type of trading. CapPlace and FirstECN for example, offered the necessary tools and access to the market to accomplish this type of trading.
How to Select the Best Forex Currency Pairs for You
Now that you understand the types, how do you choose? Here are three factors to consider:
- Your Trading Style: Are you a scalper who opens and closes trades in just a few minutes? If so, stick to the major currency pairs because they have the low spreads. Are you a swing trader with trades that last on average days or even weeks? If so, you could see some great trending potential from using the minor forex pairs.
- Your Risk Tolerance: If you’re risk-averse, the bigger currency pairs (the majors) are representative of the most stability. If you’re a trader with a higher risk profile and the experience to back it up, exotic currency pairs may present alluring potential as well.
- Your Trading Schedule: Currencies have the most activity within their respective markets’ hours of operation. For example, EUR pairs and GBP pairs are most busy during the London session. JPY pairs are most active during the Asian session. If you’re trading a pair that is most active hourly, you are assured tighter spreads and liquidity. This is a simple, but also a powerful tip on how to find the best forex currency pairs to trade at any given time.
Finding your best pairs is a lot easier when your broker is in tune with your strategy. Platforms like SuxxessFx, Tradgrip and Algobi add substantial value by having effective charting and analytics that enable traders to see opportunities across all pairs.
Conclusion
There is no definitive answer to the question, “What are the best FX currency pairs to trade?” The answer is found in your strategy, your personality and your objectives. The most traded FX pairs, like the EUR/USD provide stability and low cost and are a fantastic place to start! As you grow in confidence you can navigate the opportunities presented by FX minor pairs and exotic pairs FX – sometimes offering the highest reward.
The important thing is to start with a few pairs, get to know their behaviors and implement your strategy around them. You can then bring your choice of currency pairs in line with your trading plan, giving you a more directed, disciplined and hopefully, successful trading career.
FAQs
- What are the 7 major currency pairs?
The seven major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. They all involve the U.S. Dollar and are known for their high liquidity.
- Which currency pair is best for beginners?
The EUR/USD is widely considered the best pair for beginners. It has the highest liquidity, the tightest spreads, and a vast amount of readily available analysis, making it easier to learn and trade.
- Are exotic pairs too risky to trade?
Exotic pairs carry a higher level of risk due to their high volatility and low liquidity. They are generally not recommended for beginners. Experienced traders who understand these risks and have solid risk management strategies can find profitable opportunities in them.
- What is a “cross-currency” pair?
A cross-currency pair, or a minor pair, is a currency pair that does not include the U.S. Dollar. Examples include EUR/GBP, AUD/JPY, and GBP/CAD.
- How does liquidity affect my choice of currency pair?
High liquidity means that a pair can be bought or sold in large volumes without causing significant price movements. This leads to lower transaction costs (tighter spreads) and smoother trade execution, which is highly desirable for most trading strategies.