Best Currency Pairs to Trade in Forex

Due to the leverage and lower margin requirements that forex trading offers, it has become incredibly popular. This article analyzes popular currency pairs in forex and offers advice on how to trade more wisely, including using technical analysis, choosing the best currency pair to trade, and employing reliable risk management strategies. Finally, test out these methods on a practice account to hone your trading abilities. Since it gives investors the chance to obtain exposure to the forex market and use leveraged trading with lower margin requirements than in equities markets, forex trading has grown in popularity over the past few years.

The currency market, with about $7.5 trillion in daily trades in 2022, is also the biggest and most liquid market in the entire globe. This makes the forex market the perfect location for traders wishing to trade with large leverage. However, you must comprehend the most popular currency pairings and how to trade them before entering the fast-paced world of forex. In this post, we’ll examine the main forex currency pairs you should be familiar with and offer some advice on how to trade them successfully.

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Understanding Currency Pairs

The exchange rate between two different currencies is known as a currency pair. Since you must concurrently sell one currency in order to buy another, all currencies in forex trading are traded in pairs. A base currency and a quote currency make up each currency pair. The quote currency is the second currency in the pair, with the base currency being the first. For instance, the base currency in the currency pair EUR/USD is the EUR, and the quote currency is the USD. Applying this to an exchange rate of 1.1000, means that in order to purchase 1.00 Euros, the base currency, you would need to have 1.10 dollars, the quote currency.

Major currency pairs, which include the US dollar, Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar, are the most frequently traded currency pairs. High liquidity, narrow spreads, and average volatility are common characteristics of these currency pairs. Minor and exotic currency pairs, on the other hand, have greater volatility, bigger spreads, and less liquidity. Exchange rates between the currencies are influenced by a number of variables, such as economic statistics, central bank policies, geopolitical developments, and market sentiment. You can better grasp price movements by becoming familiar with those aspects, but some traders prefer to just concentrate on chart reading when making trading decisions.

Different kinds of forex pairs

In general, three criteria can be used to categorize forex pairings. The majors, commodity currencies, and cross currencies are as follows: The most frequently traded currencies on the markets are those that are major. Although estimates of the number of important currency pairs vary, most lists include EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Currency pairs known as commodity currencies have a value that is closely correlated to a commodity, such as oil, coal, or iron ore. This list includes the commodity currencies AUD/USD and USD/CAD.
Currency pairs known as cross currencies exclude the US dollar. EUR/GBP and EUR/JPY, two cross-currency pairs, entered the list of the top 10.

What are the most traded forex pairs in the world?

EUR/USD

The most popular currency pair is EUR/USD, which accounts for 24.0% of all forex trades made each day in 2019.1 The appeal of the EUR/USD pair is due to its representation of the two largest economies in the world: the US and the European Union. The huge daily volume of EUR/USD trades guarantees the pair’s high liquidity, which often produces narrow spreads. For traders, liquidity and tight spreads are alluring because they allow for the execution of huge trades with little disruption to the market.

The interest rates set by the European Central Bank (ECB) and the US Federal Reserve (Fed) are only two of the many variables that affect the EUR/USD exchange rate. Because higher interest rates provide a better return on their initial investment, the currency with the higher interest rates will typically be in higher demand. The euro would probably strengthen against the dollar if, for example, the ECB had set interest rates higher than the Fed.

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USD/JPY

The USD/JPY currency pair, also referred to as “the gopher,” consists of the US dollar and the Japanese yen. With 13.2% of all daily forex transactions in 2019, it is the second-most traded forex pair on the market.1 The US dollar is the most widely traded currency in the world, and the Japanese yen is the most widely traded currency in Asia. Like EUR/USD, USD/JPY is renowned for its high liquidity. The Bank of Japan (BoJ) sets interest rates for the Japanese economy, much as the Federal Reserve and the European Central Bank (ECB), which has an impact on how much the yen is worth in relation to the US dollar.

GBP/USD

The US dollar and the pound sterling are the two currencies in this pair. Due to the deep-sea cables that were once used to transmit the bid and ask prices between London and New York, the GBP/USD is also known as the “cable” pair. The GBP/USD pair accounted for 9.6% of all daily currency transactions in 2019.1 The strength of the GBP/USD currency combination, like that of the majority of other currency pairs, stems from the relative robustness of the British and American economies.

The pound will probably strengthen versus the dollar if the British economy expands more quickly than the American one. The opposite is true, though, if the American economy is performing better than the British economy.The quote price of GBP/USD is influenced by the respective interest rates set by the Bank of England (BoE) and the Fed, just like the first two most popular currency pairs on this list. The price of the GBP/USD currency pair can be significantly impacted by the ensuing difference in interest rates between the pound and the dollar.

AUD/USD

The Australian dollar is represented by the currency pair AUD/USD, also known as the “Aussie”. In 2019, it accounted for 5.4% of every day’s forex trades.1 The value of Australia’s exports, which include commodities like coal and iron ore, make for a sizable amount of the nation’s gross domestic product (GDP), is strongly correlated with the value of the Australian dollar.2 It is likely that a decline in the price of these commodities on the global market would result in a corresponding decline in the value of the Australian dollar. This would result in a stronger US dollar, making it cheaper to buy one Australian dollar when it comes to the AUD/USD currency combination.

The difference in interest rates between the Reserve Bank of Australia (RBA) and the US Federal Reserve has an impact on the AUD/USD exchange rate in a manner similar to that which it has on the currency pairs previously stated. For instance, if American interest rates are low, the US dollar would likely weaken against the Australian dollar and would cost more US dollars to acquire one.

USD/CAD

Because of the loon bird that appears on Canadian dollar coins, the US dollar and the Canadian dollar are paired together and are popularly referred to as the “loonie” (USD/CAD). In 2019, 4.4% of all forex trades per day were USD/CAD exchanges.1 Since oil is Canada’s principal export, the value of the Canadian dollar is directly correlated with the price of crude. Canada may make a sizable amount of US dollars through its oil exports because oil is valued in US dollars on international markets. As a result, it is likely that the Canadian dollar will appreciate in value relative to the US dollar if the price of oil rises.

A basic rule is that when oil prices rise, the US dollar tends to decline since more US dollars must be exchanged into foreign currencies to buy the same amount of oil as previously. Due to the strong correlations between the Canadian dollar and the price of oil, pricey oil will likely result in a strengthening of the Canadian dollar. As a result, when trading USD/CAD, traders should keep an eye on the price of both Brent crude and US crude because any changes in the oil market will probably have an impact on this forex pair’s exchange rate.

USD/CNY

The USD/CNY currency pair, which combines the US dollar and the Chinese renminbi, or yuan, accounted for 4.1% of all daily forex trades in 2019.1 Since the commencement of the US-China trade war, the yuan has generally been losing ground to the US dollar. This is partly attributable to the Chinese government, which allowed the yuan to weaken knowing that doing so would lower the cost of exports and expand the country’s already considerable market share in nations other than the US.

You can trade the USD/CNH currency pair with IG; CNH is the yuan’s offshore counterpart that is traded outside of China’s core. Only when yuan is exchanged in the onshore Chinese market is it referred to as CNY. The Chinese government has historically not exerted as much control over CNH as it has over CNY, making it potentially more volatile. It may be a better option for speculative trading due to its volatility. Investors should monitor developments in the US-China trade conflict since they could have an impact on the value of this currency pair.

USD/CHF

The USD/CHF currency pair, also referred to as the “Swissie,” consists of the US dollar and the Swiss franc. The Swiss financial system has historically been a haven for investors and their money, making USD/CHF a popular currency combination. As a result, traders frequently resort to CHF during periods of rising market volatility, but they usually show less interest in the Swiss franc during periods of rising market stability. As CHF increases versus the USD as a result of greater investment, it is possible that the price of this pair will decline during periods of increased volatility. CHF is not as commonly traded as the six currency pairs listed above because it is largely used as a safe haven or during economic downturns. But in 2019, 3.6% of all daily forex transactions were in the USD/CHF currency pair.

USD/HKD

The Hong Kong dollar is compared to the US dollar using USD/HKD. From 2016 to 2019, this pair’s trading volume more than doubled, from 1.5% to 3.3% of all daily currency transactions. The protests in Hong Kong that dominated 2019 may have contributed to the increase. The Fugitive Offenders Amendment Bill’s attempted adoption and claims of police violence against the residents of Hong Kong were the causes of the protests.

The protests started around a month before the data was gathered, therefore it is likely that they had an impact on the USD/HKD trading volume. This might be partially explained by the fact that many traders and speculators concentrated on the Hong Kong dollar due to the heightened media attention, believing that any news from the city would have an impact on the currency’s value. A linked exchange rate is a special arrangement that links the value of the Hong Kong dollar to the US dollar. HK$7.75 to HK$7.85 to US$1 is the range in which the Hong Kong dollar may vary, and traders may profit from any price changes within this range.

EUR/GBP

The EUR/GBP pair, which combines the euro and the British pound, is frequently regarded as one of the hardest pairs to predict prices for. Due to the UK’s close proximity to Europe and the resulting close trade links between these two economies, EUR and GBP have historically been linked. Despite the alleged challenges associated with anticipating its movements, EUR/GBP transactions still accounted for 2.0% of all daily trades in 2019, ranking it as the ninth most traded currency pair on our list.1

Similar to the other currency pairs on this list, traders should be aware of any ECB and BoE pronouncements that might have an impact on the euro and pound exchange rates, which would heighten volatility. This currency pair’s price has moved quite wildly in recent years, partly because of the uncertainty surrounding Brexit. Trading in markets with high volatility can be appealing, but it’s crucial to have a risk management plan in place before entering a position.

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USD/KRW

The US dollar is pitted against the South Korean won in the tenth pair on this list, USD/KRW. This is the first year that the USD/KRW pair has made it into a list of the top ten most traded currencies, and in 2019 it accounted for 1.9% of all daily forex transactions.1 Since the turn of the century, South Korea’s economy has expanded, and as of November 2019, it is now the fourth largest in Asia and the eleventh largest in the world.

This may be the cause of the increasing USD/KRW activity, as traders and speculators look to gain exposure to markets other than Japan, China, and Hong Kong. People sometimes refer to South Korea’s tremendous economic growth as the Miracle on the Han River, especially following the end of the Korean War in 1953. Due of South Korea’s membership in the G20, the OECD, and the UN, as well as its current capitalization of this growth, many market participants see South Korea and its currency as an intriguing investment prospect.

Conclusion

While EUR/USD dominates the daily volume of forex trades, traders have a variety of other viable and liquid currency pairings to pick from in an effort to turn a profit. Before selecting a currency pair to trade, traders should take a number of factors into account. They should also conduct their own technical and fundamental analysis to determine whether the currency pair is a viable trading option at that specific time, depending on announcements from central banks or ongoing trade disputes.