Best Currency Pairs to Trade
As a new comer to the FX markets, you're probably wondering what's available to trade in the largest market and which currency pairs are best to trade.
Let's begin by looking at the 3 different categories of currency pairs; majors, crosses and exotics.
The below table lists the major currency pairs and as you can see are they are made up the major countries vs the US Dollar.
|EUR:USD||Euro vs US Dollar (Fiber)|
|GBP:USD||British Pounds vs US Dollar (Sterling or Cable)|
|AUD:USD||Australian Dollar vs US Dollar (Aussie)|
|NZD:USD||New Zealand Dollar vs US Dollar (Kiwi)|
|USD:JPY||US Dollar vs Japanese Yen (Yen)|
|USD:CHF||US Dollar vs Swiss Franc (Swissie)|
|USD:CAD||US Dollar vs Canadian Dollar (Loonie)|
The major currencies are the best place to begin as a new forex trader. There is vast amounts of liquidity and the spreads are tighter, allowing better fills when executing orders.
It's important to remember that most of the majors are either positively or negatively correlated to some extent.
The EUR:USD and GBP:USD are positively correlated, meaning these pairs move in the same direction.
At this point in time the Swiss National Bank (SNB) has pegged the Franc against to the EUR, which has resulted in the EUR:USD and USD:CHF, having a very high negative correlation, meaning they move in opposite directions. Before the SNB pegged their currency, there was still a strong negative correlation between the the 2 pairs of currencies.
When entering trades its important to pay attention to the correlation between each of the pairs. You don't want to double your risk and exposure by taking log positions in both EUR:USD and GBP:USD or shorting the EUR:USD and taking a long position in the USD:CHF.
The commodity currencies are made up of the Aussie, Kiwi and Loonie. They're called the commodity currencies as the countries behind these currencies rely heavily on exporting raw material for the GDP.
Crosses refers to any currency pair that doesn't include the US Dollar. The below list includes some but far from all of the crosses that are traded.
|AUD:CAD||Australian dollar vs. the Canadian dollar|
|AUD:CHF||Australian dollar vs. the Swiss franc|
|AUD:JPY||Australian dollar vs. the Japanese yen|
|AUD:NZD||Aussie dollar vs. the New Zealand dollar|
|CAD:JPY||Canadian dollar vs. the Japanese yen|
|CHF:JPY||Swiss franc vs. the Japanese yen|
|EUR:AUD||Euro vs. the Australian dollar|
|EUR:CAD||Euro vs. the Canadian dollar|
|EUR:CHF||Euro vs. the Swiss franc|
|EUR:GBP||Euro vs. the British pound|
|EUR:JPY||Euro vs. the Japanese yen|
|EUR:NZD||Euro vs. the New Zealand dollar|
|GBP:AUD||British pound vs. the Australian dollar|
|GBP:CHF||British pound vs. the Swiss franc|
|GBP:JPY||British pound vs. the Japanese yen|
|NZD:JPY||New Zealand dollar vs. the Japanese yen|
The most commonly traded crosses are the AUD:JPY, EUR:JPY, GBP:JPY and EUR:GBP. These crosses offer great trading opportunities and as you delve further into trading forex, you will notice that the crosses provide much cleaner trends than the majors do.
Exotic currencies are made up of developing and emerging economies rather than developed and industrialized nations like the majors.
|USD:TRY||US Dollar vs Turkish Lira|
|USD:BRL||US Dollar vs Brazilian Real|
|USD:MXN||US Dollar vs Mexican Peso|
|USD: CNY||US Dollar vs Chinese Renminbi|
|USD:MYR||US Dollar vs Malaysian Ringgit|
|USD:THB||US Dollar vs Thai Baht|
|USD:RUB||US Dollar vs Russian Rouble|
Novice traders should avoid the exotic currencies due to the lack of liquidity and the unpredictable nature of them. Due to the inherit risk of these trading these currencies, you will notice much larger spreads than the majors, which increase the difficulty of being profitable before you even enter an trade. Traders who wish to trade the exotics really need to do their homework on the nation's economic and political situation for the currency they wish to take a position in.
In conclusion, we advise to begin your trading career with the majors and then including some of the highly traded crosses. The best pairs to begin with are AUD:USD, EUR:USD, GBP:USD, NZD:USD, USD:JPY AUD:JPY, EUR:GBP.