What are the Best Currency Pairs to Trade?

Mar 30, 2018

A common question that we get asked at Urban Forex: What are the best currency pairs to trade?

This article will run through all you need to know about the currency pairs so you can decide for yourself which are the best pairs for you to trade.

The Major Currencies

There are 8 major currencies: 

  • USD - United States Dollar
  • EUR - Euro
  • JPY - Japanese Yen
  • GBP - Great British Pound
  • CHF - Swiss Franc
  • CAD - Canadian Dollar
  • AUD - Australian Dollar
  • NZD - New Zealand Dollar

These are referred to as the Majors as these currencies are the most widely traded.

Focusing on these 8 major currencies give you a possible 28 pairs to choose from when trading.

Any major currency that is paired with the USD is known as a major pair while any of the other major currencies paired with each other are known as minors or crosses.

When a major currency is paired with a currency from an emerging economy (E.G. Brazil, Mexico, Turkey, South Africa etc) it's known as an Exotic pair.

But all these terms don't matter, you want to know what to trade and why...

Focus on the Majors and Minors

Why just focus on the major currencies when there are hundreds to choose from?

Liquidity, Spread, and Slippage.

It's simple, the majors are the most liquid and widely traded currency pairs in the world followed by the minors.

Check out the chart below showing the seven most actively traded currencies.

The US Dollar is involved 84.9% of all transactions.

The Euro’s share is second at 39.1%, with the Yen third at 19.0%.

As you can see, it's the major currencies that are top spots on this list!

Being more liquid usually means having lower spreads and having lower spreads usually means less chance of slippage.

Liquidity 

Liquidity refers to how active a market is. It is determined by how many traders are actively trading and the total volume they’re trading.

The Forex market is liquid because it is tradable 24 hours a day during weekdays, but some currencies are more liquid than others (E.g. the major and minor pairs are far more liquid than the exotic pairs)

Being more liquid makes them easier to buy and sell usually meaning that the spreads will be lower.

Spreads 

The spread is basically the broker's commission. It is the difference between the bid price and the ask price. The spread on the majors are usually very low, sometimes only 1 pip.

The exotics, on the other hand, can have very high spreads that are usually well over 10 pips. That means well over 10 pips that you need to overcome before your trade is in profit. 

The blue circles in the image above indicate the spread in pips for the particular pairs.

EURUSD has only got a 0.2 pip spread while an exotic pair like CHFSGD (Swiss Franc and Singapore Dollar) has a spread of 11.2 pips.

With higher spreads, there is also the potential for slippage.

Slippage

Slippage is when an order is filled at a price that is different than the requested price.

Due to the low liquidity, exotic pairs can be much more volatile than the major and minor pairs. This volatility means the pairs can jump up and down very quickly.

This volatility leads the broker to protect themselves with higher spreads and these higher spreads along with the volatility cause slippage.

Conclusion

With 28 pairs to choose from when looking at the major currencies alone, there is no need to take on the extra risk in trading the exotic pairs (even if the term exotic pair does sound more appealing). 

Even within the 28 pairs, you can narrow them down to your favorite 5-10 which can be based on which sessions you trade.

Let me know which are your favorite pairs to trade in the comment section below.

I will also have an article on the best times to trade coming soon so keep an eye out for that one.

With Pip Love,

Garry at Urban Forex

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