Understanding Forex Currency Pairs
In the world of foreign exchange trading (forex) there are countless potential currency pairs to trade. But only a handful account for the majority of the market’s $6.6 trillion worth of trades every day.
The most popular currency pair in the forex market is EUR/USD, which represents the currencies of two of the largest economies in the world. As such, EUR/USD has a high degree of ‘liquidity’ – that is, the relative ease with which it can be bought and sold.
However, traders can make money on a wide variety of currency pairs, and success starts with the right research. The key to finding the best possible pair for your trading strategy is to focus on the fundamentals that influence each country’s economy.
Traders study the economic outlook for each of the two currencies in the pair, then decide whether they expect one to rise or fall against the other. If they believe that the euro will appreciate against the US dollar, then they would buy EUR/USD; conversely, if they believed that the dollar would strengthen against the euro, then they would sell the pair.
There are many different factors that can influence a currency pair’s value, including interest rates, inflation, employment figures, and GDP growth. Geopolitical events can also introduce volatility into the pair, such as the outcome of elections or political scandals.
As well as studying the economic fundamentals of each pair, traders must consider how they relate to each other in terms of their correlation with commodity prices. For example, the USD/CAD currency pair is closely linked to the price of oil, and changes in the price of Brent crude usually reverberate across the pair.
There are a number of different trading strategies for currency pairs, and the best ones tend to be those that align with a trader’s risk tolerance, trading style, and level of experience. As with any investment, there is a level of risk associated with trading currency pairs, and it’s important to always stick to a well-thought-out plan and to record both winning and losing trades for future reference.
There are countless forex pairs to choose from, but most traders will only ever trade the majors, which include the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. Some traders will also include a few key currency pairs that don’t feature the US dollar (known as crosses). This includes EUR/GBP, EUR/AUD, and GBP/CAD. These are less frequently traded and therefore have a lower degree of liquidity than the majors. They are also more sensitive to political and economic events, and as a result their relative values can fluctuate much more widely.