The forex market allows traders to exchange numerous currencies from different parts of the world. This diversity has produced over 50 currency pairs that can be traded on forex trading platforms. Keep reading to discover the 7 most traded currency pairs in the forex market.
What are currency pairs in Forex trading?
While trading the spot forex market on brokerage platforms, you have to buy one currency and sell the other simultaneously. Hence the currencies are traded in pairs. The first is the base currency, while the second is the quote currency. In a pair such as USD/CAD, the US dollar is the base currency while the Canadian dollar is the quote currency.
3 Types of Forex Currency Pairs
There are three main categories of forex pairs;
Major Currency Pairs
These pairs contain the US dollar as the base or quote currency. They are widely traded with high liquidity and volatility. Examples are; GBP/USD, EUR/USD, and USD/JPY.
Minor Currency Pairs
These forex pairs contain currencies from developed economies, excluding the United States dollar. They are also liquid and volatile pairs, also known as cross pairs. Examples include; CAD/JPY, EUR/CHF, etc.
Exotic Currency Pairs
Exotic forex pairs contain one currency from a developed economy and another from an emerging economy. They are highly volatile pairs with lower trading volume than major and minor pairs.
The top traded currency pairs are those with high liquidity and volatility. Contrary to popular belief, these pairs aren’t just major pairs, but also include some cross pairs.
Top 7 Currency Pairs in Forex Trading
EUR/USD
EUR/USD is the most liquid forex pair and maintains its reputation as the most traded pair. This pair contains the top two economies in the world; hence lots of financial institutions, individuals and governments actively trade them daily.
It makes up over 20% of all forex transactions and presents favorable trading conditions for most traders. Since it’s highly liquid, the spreads are lower, facilitating easy trade execution and management. Higher spreads are associated with slippages which can negatively affect your trading results.
Besides the favorable trading conditions, traders love the fact that there is sufficient and easily accessible fundamental and economic data relating to the US and European economies. This makes it easy to analyze them and make trading decisions accordingly.
The pair is primarily influenced by decisions from the European Central Bank (ECB) and the US Federal Reserve. News reports such as Non-farm Payroll in the United States also have a high impact on this pair.
GBP/USD
The British pound is the official currency of the United Kingdom. The pound is closely correlated with the euro, and the large volume of trading and economic activities in the UK makes the GBP/USD pair the second most traded forex pair.
It is also known as the cable, and it’s highly responsive to the economic and political health of the United Kingdom. In times of turmoil and uncertainty, the British pound tends to lose value, and this causes the GBP/USD pair to assume a downtrend. For instance, in 2016, the pound experienced a flash crash in October as some global figures made negative comments about the Brexit negotiations.
The reverse would be observed in times of economic boom.
The Bank of England sets the interest rates and determines the monetary policies that govern the economic activities in the country. This pair is highly traded because its huge trading volume provides tighter spreads and enough volatility for traders to take advantage of.
AUD/USD
The Australian dollar against the US dollar is a unique currency pair. The value of the Australian dollar is closely tied to its exports. These exports are mostly commodities like iron ore, gold, coal, copper, aluminum, and agricultural products. As such, it’s often regarded as a commodity currency because it could increase in value if the demand for these commodities increases.
While trading this pair, monitor the industrial production, exports, and interest rate of the Australian dollar and US dollar.
If the Australian dollar weakens, AUD/USD would assume a downtrend and vice versa.
USD/JPY
The USD/JPY pair is also known as the ‘gopher.’ It comprises the Japanese yen and the United States dollar. The presence of the US dollar increases its liquidity and volatility, making it one of the most traded pairs. Furthermore, the Japanese yen is the most traded currency in Asia. It is primarily traded during the Asian session, and the large, export-driven economy of Japan fuels the trading of the yen.
The Bank of Japan has unique monetary policies that are aimed at improving the competitiveness of Japanese exports as a way of improving international trade. In times of crisis or turmoil, most investors prefer to buy the Japanese yen due to its stability and current account surplus.
The USD/JPY pair is influenced by economic and political news releases from the United States and Japan.
GBP/JPY
The British pound against the Japanese yen is a cross currency pair (also known as a minor pair). It is highly volatile and liquid than some major pairs. The pair is primarily influenced by changes in the interest rates in Britain or Japan.
The higher the interest rate, the stronger the currency since demand increases. For example, a high interest rate would strengthen the British Pound, and you’ll need more Japanese yen to buy one GBP.
USD/CAD
The USD/CAD pair is also known as the loonie. The Canadian dollar is also known as a commodity currency since its value is closely tied to that of its main exports. While trading this currency pair, ensure you monitor the prices of oil, natural gas, and other petroleum products.
USD/CHF
This currency pair is also known as the ‘swissie.’ It comprises the Swiss Franc and the US dollar. The Swiss Franc is the official currency of Switzerland and is considered one of the safe-haven currencies. In times of turmoil (risk-off environment), investors invest in the Swiss Franc due to its stability. As expected, the interest rates, news, and economic reports of Switzerland would largely influence the movement of this pair.
4 Factors to Consider When Choosing a Currency Pair in Forex
Your Trading Style
Before choosing a currency to trade, you should consider your trading style and requirements. If you’re a scalper, then pairs with tighter spreads would favor your trading style. If your strategy requires highly volatile trading conditions, you might be better off with a volatile pair that provides enough trading opportunities.
The Trading Session
The characteristics of forex pairs vary with the trading session. A session like the Asian session has a low trading volume but with significant price swings in pairs containing the Australian dollar, New Zealand dollar, and Japanese yen.
The Economic Calendar
The currency you should trade depends on the economic calendar for that trading period. If you are a conservative trader who doesn’t trade the news, you should avoid trading currencies with upcoming high-impact news events.
Technical Analysis
Finally, your trades should be determined by technical and fundamental analysis. Technical analysis helps you get the best trade entries and exits. It would help if you traded currency pairs with optimum entry and exit points from a technical analysis perspective.
Start using DecodeFX to know more about the top forex pairs
The best way to find the best currency pair to trade is to sign up on a forex trading platform and discover how the various pairs move. Make sure you use a platform with favorable trading conditions to help you make the most of your trading strategies.