New to Forex trading? You need to know what Forex currency pairs to trade. The goal of this article is to educate you on how to make that decision.
But first things first. What are Forex currency pairs – and why do they matter?
Well, the answer is pretty simple. What you need to know is that you can’t trade currencies in isolation. You have to trade one currency against another – this is called a currency pair.
An example of a currency pair is EUR/USD (the euro against the dollar). Each currency pair also has a price. If you take our example of EUR/USD, this currently (at the time of writing) has a price of 1.216. In other words, one euro is currently worth $1.216.
When you trade a currency pair, you’re speculating whether its price will either increase or decrease in the future.
Let’s look at our example again.
If you think the value of EUR/USD is likely to increase in the future, you can buy that currency pair. If the price of this pair does increase, you can then sell the pair to bank a profit.
On the other hand, if you think the value of EUR/USD is likely to decrease in the future, you can sell that currency pair. Should the price of that pair decrease, you can then buy the pair to bank a profit.
You might be wondering whether all currency pairs are made equal. In other words – are some easier to trade than others?
The answer is… it depends.
Major global events – including economic, political and geopolitical events – can impact the value of currency pairs.
It’s actually not that hard to understand why.
For instance, let’s say that the eurozone is exposed to some negative economic news (such as high unemployment). This news makes global investors nervous about the economic strength of the eurozone, which in turn drags on the strength of the euro. This translates to a weakening of a currency pair such as EUR/USD.
So as a trader, your task is to work out the price direction of a pair you want to trade. You can do that through two broad trading approaches: technical analysis and fundamental analysis.
With technical analysis, you attempt to find historical patterns on price charts to predict future price moves. With fundamental analysis, you judge the likely impact of the global events we outlined earlier.
But let’s get back to what Forex currency pairs you should trade.
The starting point is to look at something called “Major Pairs”. These are the most commonly traded currency pairs in the world. These pairs include:
You’ll notice that the US dollar (USD) appears in every Major Pair. That’s because it’s the world’s reserve currency. It’s the most commonly used currency in the world.
Major Pairs belong to the world’s most developed economies. As a result, they enjoy high liquidity – and tend to experience price fluctuations. Brokers also tend to provide the best trading conditions for these pairs, given their liquidity.
This doesn’t mean that Major Pairs are necessarily the best to trade – but they will probably give you the most opportunities to trade.
Something you need to know about is correlated currency pairs. These are pairs that tend to follow each other on a price chart.
The correlation can either be positive or negative. A positive correlation is where two currency pairs move in the same price direction. Conversely, a negative correlation is where two currency pairs move in the opposite direction to each other.
Keeping track of currency correlations is critical, especially if you plan on making multiple trades at the same time. The last thing you want to do is take positions where correlated currency pairs cancel each other out.
Lastly – it’s important to know that currency correlations aren’t permanent. A relationship between two currency pairs can change over time. Also, some pairs have a completely random relationship where there is no correlation at all.
You can keep track of currency correlations with a currency correlation calculator. There are many free versions you can use online.
The truth is, the best Forex currency pair to trade is the one you are most knowledgeable about.
The great news is you can become pretty knowledgeable about any currency pair pretty quickly. The internet has thousands of free resources you can utilise to educate yourself.
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