What Are the Best Forex Pairs to Trade?

The foreign exchange (forex) market is a global marketplace for exchanging national currencies, operating 24 hours a day during weekdays. All transactions involve the simultaneous buying of one currency and selling of another, forming a currency pair. Their fluctuating exchange rates offer potential opportunities for traders.

Characteristics of Actively Traded Forex Pairs

Certain characteristics make specific forex pairs attractive for active trading. These attributes influence how easily and efficiently a currency pair can be traded.

Liquidity refers to the ease with which a currency pair can be bought or sold without significantly affecting its price. High liquidity means many buyers and sellers, leading to high trading volumes and quick trade execution near the desired price. Low liquidity can result in difficulties finding a counterparty, potentially leading to delays or execution at less favorable prices.

Volatility measures the degree and speed of price changes in a currency pair. A highly volatile pair experiences large and rapid price swings, while a less volatile pair exhibits more gradual movements. Volatility creates opportunities for traders seeking price movements, but prices can also move against a position quickly. Higher liquidity generally leads to lower volatility, as large trading volumes absorb price impacts.

Spreads represent the difference between the bid (buy) price and the ask (sell) price of a currency pair. Tighter spreads indicate lower transaction costs for traders. Actively traded, highly liquid pairs have tighter spreads due to the continuous flow of buy and sell orders. Pairs with lower liquidity often have wider spreads, increasing trading costs.

Market hours also influence currency pair activity. Specific pairs become more active during certain global trading sessions, such as the overlap of the London and New York sessions. This increased activity often translates to higher liquidity and tighter spreads for relevant pairs.

Major Currency Pairs

Major currency pairs always include the US dollar (USD) as one component, paired with another currency from a major global economy. These pairs are known for their substantial trading volumes, high liquidity, and tighter spreads, making them popular. Their movements are often influenced by the monetary policies of their respective central banks and significant economic data releases.

The EUR/USD pair, representing the Euro and the US Dollar, is the most widely traded currency pair globally. It exhibits high liquidity and relatively stable price action, though it is responsive to interest rate differentials and economic indicators from both regions. The GBP/USD, known as “Cable,” pairs the British Pound with the US Dollar and is characterized by its volatility and quick movements, influenced by UK economic data and Bank of England policies.

The USD/JPY, or “Gopher,” involves the US Dollar and the Japanese Yen. Its movements are impacted by interest rate differences between the US and Japan, and its status as a safe-haven currency during global uncertainty. USD/CHF, or “Swissie,” pairs the US Dollar with the Swiss Franc, also considered a safe-haven currency, tending to appreciate during geopolitical instability.

Other major pairs include USD/CAD, AUD/USD, and NZD/USD. USD/CAD, or “Loonie,” links the US Dollar with the Canadian Dollar and is influenced by commodity prices, particularly crude oil. AUD/USD, “Aussie,” and NZD/USD, “Kiwi,” represent the Australian and New Zealand Dollars against the US Dollar, and are often affected by commodity prices and economic data from their commodity-exporting economies.

Minor and Exotic Currency Pairs

Beyond major currency pairs, the forex market includes minor and exotic pairs. Each category has distinct characteristics regarding liquidity, spreads, and volatility.

Minor currency pairs, also called cross-currency pairs, involve two major currencies but do not include the US dollar. Examples include EUR/GBP, EUR/JPY, and GBP/JPY. These pairs have lower liquidity and wider spreads compared to major pairs, though they allow for smooth trading in normal market conditions. Their volatility patterns often reflect the economic interplay between the two non-USD economies. For instance, EUR/JPY is known for its trending behavior, while GBP/JPY is nicknamed “The Dragon” due to its high volatility.

Exotic currency pairs consist of one major currency paired with a currency from a smaller or emerging economy. Examples include USD/MXN (US Dollar/Mexican Peso) and EUR/TRY (Euro/Turkish Lira). These pairs exhibit significantly lower liquidity and wider spreads due to less frequent trading volumes. They can experience higher volatility and are more susceptible to sharp price swings, often driven by regional news, political instability, or economic conditions in the emerging market country.

Major pairs offer the highest liquidity and tightest spreads, making them more predictable. Minor pairs provide moderate liquidity and slightly wider spreads, offering diversification opportunities away from the US dollar. Exotic pairs, while potentially offering higher returns due to volatility, come with increased costs through wider spreads and lower liquidity, requiring careful consideration of underlying economic and political factors.

Considerations for Personal Pair Selection

Selecting suitable currency pairs involves aligning market characteristics with an individual’s preferences and approach. The choice of currency pair can impact trading outcomes.

A trader’s individual style plays a role in pair selection. Day traders, who seek to profit from short-term price movements, might prefer pairs with higher volatility for more frequent opportunities. Swing traders or those with a longer-term horizon might favor pairs with consistent trending behavior. The liquidity of a pair also affects entry and exit points, with highly liquid pairs offering better execution for all trading styles.

The amount of time an individual can dedicate to monitoring markets also influences pair choice. Actively traded pairs that move frequently may require more constant attention. Individuals with less time might find less volatile pairs or those influenced by less frequent economic data releases more manageable.

Understanding the underlying economies of the currencies in a pair is important. Traders with a strong grasp of, for example, European economic data and monetary policy might find trading EUR-related pairs more intuitive. This economic understanding allows for a more informed assessment of potential price drivers and market reactions.

A trader’s preference for market analysis can guide pair selection. Those who primarily use fundamental analysis, focusing on economic news, central bank announcements, and geopolitical events, may gravitate towards pairs that react strongly to such catalysts. Traders who prefer technical analysis, relying on chart patterns, indicators, and historical price data, might prioritize pairs that exhibit clear and consistent technical patterns.

Accessing the Forex Market

Engaging with the forex market requires selecting a suitable broker. This initial choice lays the groundwork for all subsequent trading activities.

Choosing a forex broker involves evaluating regulatory compliance, available trading platforms, and the range of currency pairs offered. In the United States, brokers must be regulated by the Commodity Futures Trading Commission (CFTC) and be members of the National Futures Association (NFA). This regulatory oversight protects market participants and ensures adherence to financial standards. Brokers offer various account types, such as standard or mini accounts, with differing minimum deposit requirements and leverage options.

Opening a trading account requires submitting personal information for identity verification, including a name, address, and tax identification number. Brokers comply with customer identification rules, which may involve providing documents like a government-issued ID and proof of address. Minimum deposit requirements vary, ranging from $10 to $200 or more, though many brokers suggest a higher initial deposit for more flexible trading.

Trading platforms serve as the interface for executing trades, analyzing market data, and managing positions. Popular platforms include MetaTrader 4 (MT4), MetaTrader 5 (MT5), and cTrader, which offer advanced charting tools, technical indicators, and support for automated trading strategies. Many brokers also provide their own proprietary platforms.

Various order types are available to manage entry and exit points. A market order executes a trade immediately at the best available current price. Limit orders allow a trader to specify a desired price for buying or selling, with the order executing if the market reaches that price or better. Stop orders, such as stop-loss orders, close a position if the market moves unfavorably to a predefined price, helping to manage potential losses.