Identifying Opportunities in the Currency Markets
The foreign exchange market is the largest financial market in the world right now. For new traders planning to participate in this market, learning about the best currency pairs to trade might help them win in this market. But do the best currency pairs offer the most profit when trading in the forex market?
Editor’s note: This article originally appeared on coin-media.jp and was translated into English.
The foreign exchange (forex) market is the only market that never closes during the working week, with the largest trading volume of the world’s business, which has different people worldwide participating in every day. This market has emerged from the need for a system to facilitate the exchange of different currencies worldwide to trade. It is the premier financial market globally, which reflects the economic dynamics of world trade quite clearly.
All trades made in the forex market are between the pairs of currencies from two different countries. The famous phrase from the popular Hollywood movie ‘Wall Street’ is the best description of the foreign currency exchange market: money never sleeps. No matter what time of the day it is, the forex market will stay open every week, 24 hours a day during trading days.
Those who are starting their journey in forex trading online may find themselves confused and overwhelmed by the sheer number of currency pairs available. Among all pairs, what is the best currency pair to trade? The answer isn’t as straightforward as it seems, and it varies depending on each trader. Traders should need to take the time to analyze different pairs against their own strategy, to determine which are the best forex pairs to trade in their own account.
What is currency trading?
According to a study published by Regal Core Markets, “Forex or Foreign Exchange (FX) refers to a type of trading that occurs across different currencies and markets. Compared to other types of financial exchanges, Forex is deemed to be the most stable because it has the busiest traffic with an estimated total of more or less $4 trillion daily transactions. It is also considered the most liquid since Forex utilizes no centralized governing body with transfers occurring through brokers, banks, financial institutions, and dealers.”
Forex trading is all about the buying and selling of currencies in pairs. Traders must have information about how much the currencies are worth to one another. This relationship is what defines a currency pair. A currency pair quotes two currency abbreviations, followed by the base currency’s value, which is based on the currency counter.
According to Investopedia, “currency pairs compare the value of one currency to another — the base currency (or the first one) versus the second or the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency. Currencies are identified by an ISO currency code, or the three-letter alphabetic code they are associated with on the international market. So, for the US dollar, the ISO code would be USD.”
For example, a EURUSD 1.67 means that one Euro is worth US$1.67.The base currency is Euro (EUR) and the counterpart currency is the US dollar.
Are the most popular currency pairs the best to trade?
Currently, the most dominant and strongest currency in the world is the US dollar. It is also the most widely traded currency. This is because the US economy is the largest globally. The following currency pairs listed below are not necessarily the best pairs to trade, but these are the ones that offer high liquidity, occupying most foreign exchange transactions:
- Euro — US Dollar (EUR/USD)
- US Dollar — Japanese Yen (USD/JPY)
- British Pound — US Dollar (GBP/USD)
- Australian Dollar — US Dollar (AUD/USD)
- US Dollar — Swiss Franc (USD/CHF)
- US Dollar — Canadian Dollar (USD/CAD)
From the same report by Regal Core Markets, “the values of these major currencies keep fluctuating according to each other, as trade volumes between the two countries change every minute. These pairs are associated with countries with greater financial power and the countries with a high volume of trade conducted globally. Such pairs are the most volatile ones, meaning that the price fluctuations happening during the day can be the largest.”
But does this mean that these pairs are the best to trade? Not necessarily, as traders can either lose or make profits on the volatility. The pairs mentioned above tend to have the best trading conditions as their spreads can be lower.
According to a research paper written by Rabin Bhandari, “The Currency market (or Forex market) is a very volatile and liquid market among all the financial markets. Currencies are priced in pairs and are traded in pairs. It is useful to know from an investment perspective, regarding the movement they share with each other i.e. whether they move in the same direction or in the opposite direction. Once the correlations between these pairs and their movement pattern are known, it can be used to control the overall portfolio’s exposure.”
Bottomline
There are over 200 countries in the world, and traders can find a handful of currency pairs to engage with when trading. However, even if the currency pairs are the most popular ones, it may not potentially deliver the best results to traders. If traders want to achieve success in forex trading, it is best to understand the currency pairs you trade better.
Image credit: Pixabay
