Forex Pairs: What Is The Best Currency Pair To Trade?
June 1, 2009 by T. OReilly
Filed under Forex Trading
Forex pairs are always involved in currency trading. The pair is the two currencies involved in your trade. For example if you are exchanging US dollars for Swiss francs, the currency pair is USD/CHF.
Trading is limited in most cases to the currencies of the larger financial powers, though theoretically you could trade any two currencies of the world. This does not mean necessarily the most powerful politically or the biggest countries. Because of the global importance of the Swiss banks, Switzerland for example a small country, is a major player in the financial markets.
There are 6 major forex pairs which between them account for 90% of the funds traded on the forex markets. These are:
- EUR/USD: the euro and US dollar.
- GBP/USD: the British pound and US dollar, nicknamed Cable because it used to be synchronized on both sides of the Atlantic by a cable running under the ocean.
- the US dollar and Japanese yen: USD/JPY
- USD/CHF: the US dollar and Swiss franc.
- USD/AUD: the US dollar and the Australian dollar.
the US dollar and Canadian dollar: USD/CAD
Some traders do get involved in other combinations of these major currencies or pairs that include other currencies such as the New Zealand dollar. But in the beginning it is best to stick with the majors.
The most significant single currency is the US dollar and according to a 2007 study, is involved in 85% of trades. The euro is second at 37%. Next come the yen, pound, Swiss franc, AUD and CAD in that order. These add up to more than 100% because there are always two currencies in every trade. In case you were wondering.
For a Beginner, What Is The Best Currency Pair?
Because there is a lot of information about the EUR/USD pair and the high liquidity results in a smaller spread, most experts advise starting out in forex with this pair so your costs will be lower.
Most newbies avoid some of the other currencies because they have particular characteristics that require special knowledge. For example the value of the Canadian dollar is strongly influenced by the price of oil because Canada is an oil exporter. Because Japan is a large consumer and importer of oil the Japanese yen can also be affected by the price of oil in the opposite direction.
When you are starting out you will not want to get involved in a lot of different currencies. For the first few months at least, probably the best thing to do is to take the EUR/USD market and stay with that. The second choice of the major forex pairs would be the GBP/USD for most new traders.
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