Aside from having the best trading strategy, it is also very important to know how to pick the best currency pair to trade in forex.
When you choose the right pair, chances are high that your trades will profit highly and hit your targets fast. On the other hand, if you take on a wrong pair, you will lose money or spend a lot of time holding on the same trade.
In this article I will mainly discuss why some currency pairs are worth to consider first rather than just looking at your setup signals. Also, what makes the currency pairs best to trade in Forex.
In order to achieve that, you must know how currency volatility and currency correlation works. Also the different type of currency pairs.
But let’s first take a recap on what is a currency pair? And, the difference between a major currency and a cross currency?
What is a currency pair?
A currency pair is the quotation of two different currencies. The first currency is the base currency and the second currency is the Quote/counter currency.
Examples include; EUR/USD, USD/CAD, EUR/JPY, CHF/JPY. Read more on how to read Forex Quotes.
Currency pair = Base Currency/Quote Currency
When trading a pair, you are comparing the value of both currencies on the market. You buy or sell the base currency against the quote currency.
For instance, if you choose to buy a currency pair; let’s say EUR/USD,
EUR(Euro) – is the base currency
USD(US. dollar) – is the quote Currency
You determine the value with the exchange rate. In this case, 1.2177.
So, this simply means you will need 1 euro to buy 1.2177 US dollars
Currency pairs are grouped into different categories which includes;
- Major currency pairs
- Minor/cross currency pairs
- Exotic currency pairs
Major currency pairs Vs cross/minor pairs
The major and minor currency pairs represent the major economies on the market except that all majors have a US. dollar in the pair.
Majors tend to dominate the market because of their less spreads and are highly liquid. The best example is the EUR/USD and USD/JPY.
Conversely, the minors are highly volatile and have moderate spread. They make very strong movements in the shortest time possible. The best cross pair to consider is GBP/JPY.
Lastly the Exotic currency pairs; These currency pairs have very big spreads and are less liquid. They are mainly from developing economies.
WHAT IS THE BEST CURRENCY PAIR TO TRADE IN FOREX
Before you take on a currency pair you should have a reason why you’re choosing it over the other pairs. The best currency pair to trade in forex is that which has high chances of success.
When choosing the best currency pair to trade, there are several factors you must put in consideration. To mention but a few;
1. Type of Currency Pair;
Preferably, major pairs are the best to trade compared to minors and exotic. This is simply because they are highly liquid and have very small or no spread at all.
The Major pairs is a combination of currencies from the major largest economies in the world and the US. Dollar. They make up the main seven currency pairs on the forex market. let’s take a look;
If you choose to trade the majors, EUR/USD,GBP/USD,USD/JPY and USD/CAD should come first on your list. These have literally no spreads. Also, always come first to every traders priority lists to trade. This means, they are always traded in high volumes.
When you trade the first four majors, you are certain of their movements because they have large volumes of trade. In addition, they are highly affected by the major economic news.
Apart from the major currency pairs, the minors are also best currency pairs to trade in forex.
What i like about these pairs is that, they are highly volatile. Despite their higher spreads compared to Majors, when you trade these pairs you don’t take so much time in a single trade.
Just one candlestick pattern is enough to make you profit. This makes them best pairs to trade on news release and best for daily traders.
In addition, the currency value increases with increase in volatility. So, minor/cross pairs have higher pip value compared to the majors. The best pair in this case is the GBP/JPY and EUR/JPY.
With this in mind, you can choose major pairs to trade because they are more stable and have very small spreads. Or trade minors/cross pairs because they are highly volatile and have big pip value.
2. Strength of a pair;
Knowing the strength of a currency pair also matters a lot when trading. You don’t want to take a trade that doesn’t move at all. or spends more time than you expect.
The best currency pair to trade in forex should have one currency losing value with another currency gaining value. This way, the currency pair you choose will move in a single direction. What do I mean?
Suppose you are looking at EUR/USD pair. If the Euro is gaining value (strong) while the USD is losing value (weak) then the EUR/USD is going to move upwards.
In other wards, to buy a currency pair(EUR/USD), you need the base currency(EUR) stronger than the quote currency(USD). The opposite applies if you want to sell the pair.
Now let’s look at how to choose the best currency pair to trade in forex considering the strength of the currency pair?
So, How do you Pick the Best Currency Pair to Trade looking at the strength of the currency pair?
One of the simplest and best ways is to use currency correlation. With currency correlation, currency pairs move either in the same direction or opposite one another or have no relationship at all. However, this applies when currency pairs have a relation.
Use Currency Correlation and Cross Currency Pairs
Assume your set up shows up on EUR/USD, pair. Then as you try to check on the other pairs, you notice, GBP/USD, AUD/USD and NZD/USD have the same setup. Woow! that sounds like good news.
All these pairs have one thing in common, US. Dollar as their quote currency. This means they move in the same direction almost all the time.
But you cannot trade all the pairs. You just need one. Holding other factors constant, all the setup are valid. So you need one best pair to trade.
First you need to look at their movements, compare the volumes in the market.
Second, look at their trends, which pair is trending and which one is on support or resistance level.
Third, which pair is likely to be traded by other traders in the market.
And of course the pip value and spreads.
All in all, the best pair among should be trending because you want to trade a pair that moves.
After choosing a pair, compare it with cross currency pair. This means any other pair without a US. Dollar but with the other currency.
IF you choose GBP/USD, you can look at GBP/NZD or GBP/AUD for more comparisons.
Like we earlier said, we need a currency pair that has the weakest and strongest currencies in a pair.
Initially, your set up confirmed a sell signal due a strong dollar. If you choose GBP/USD!.
Suppose you compare it with GBP/NZD pair but it’s actually trending up, then GBP/USD is not the best pair for you. You need to reconsider.
On the other hand, if GBP/NZD, is also falling/selling, then GBP/USD is the best currency pair to trade.
Since the US. Dollar is very strong, having a weak GBP(pound) will make the pair fall tremendously and hold for long.
3. Time of Trading;
You time of trading also matters a lot when choosing the best currency pair to trade in Forex.
The forex market is open 24hrs a day and operates for five days in a week. You can choose to trade at night or day or both. However, you must know the Forex market trading sessions, which pairs to trade and in which session.
The Forex Market opens with Sydney at 2:00AM (EST), Tokyo session , London session and ends with New York session at 5:00PM (EST). It is most active in sessions of overlap.
US/Europe overlap between 8AM-12PM (new York time), Europe/ Asia; 3am-4am and Tokyo/Sydney; 7:00pm -2am.
The major currency pairs are the best to consider to trade during 8AM-12PM New York overlap preferably; EUR/USD and GBP/USD.
If you trade between (3:00 AM – 4:00 AM) EST), Tokyo Session, the Yen currency pairs are the best to consider. To mention but a few; GBP/JPY.
Volatility in the market is also one of the factors you should look at when choosing the best currency pair to trade in forex. With high volatility, you spend less time on a running trade and earn more in a shortest time possible.
As a matter of fact, high volatile currency pairs have high pip value and low volatile pairs have less pip value. This is because pip value increases with increase in volatility.
However, you should keep this in mind, if you choose to trade high volatile currency pairs. It requires to use large stops or else you will suffer premature nock-outs.
High volatility is more likely to happen during the release of very important economic news. For example, Interest rate, NFP and un employment rate.
Comparing different currency pair movement can guide you to know which pair is good to trade.
Last but not least, use trend following indicators. (Moving Average indicator or Bollinger bands)
Add A moving Average indicator or Bollinger bands to your chart Analysis.
A moving Average is a trend following indicator. With a Moving Average on your chart, you can easily tell whether the market is trending or ranging. On top of that, it also shows you the direction of the currency pair. So you know which currency is weak or strong.
From the above chart, you can easily see how price held below the moving averages for long. This indicated a level of resistance however the market was trending down. However strong the resistance was, price successfully broke the level. This gave a signal that the down trend is coming to an end and there is a possible change in price direction. Let’s now see what happened next on the chart below.
The above chart shows a change in the direction of trend to the upside of the breakout on the moving averages. Price also shifts to the above the moving averages.
Moving Averages when price is in a downtrend
Price moves below the moving Averages when in a down trend. When the moving averages expand, it indicates a strong trend hence a very weak base currency. when they contract/come close, it indicates equal strength in the currencies. Here the pair is likely to congest.
Alternatively, if you choose to use a bollinger band on your chart, this time you will have three lines following price on your chart.
Adding Bollinger bands to your chart Analysis.
Bollinger bands are meant to measure price volatility. When the bands expand, there is an increase in volatility. When the bands contract, there is a fall in volatility.
However, since they also follow prices, just a simple glance you can tell whether price is trending or ranging. Also when the bands contract, it means prices are ranging/ or getting to a small pause. Take a look at the chart below
Looking at the above chart you can easily see that price is trending upwards just following the band direction. This indicates a strong currency pair as the bands expand further from prices.
This simply means, you can compare different currency pairs that have your trading set up, just looking at these indicators to choose the best to trade.
The Forex market has many currency pairs to trade but this does not mean they are all good to trade. When you choose the best currency pair to trade in forex, you increase your chances of success of your set up. This also increases your profits.
Your best currency pair to trade must have a weak currency and a strong currency.
Now that you know how to determine the strength of a currency pair, you will be able to know what is best to trade.
The best currency pair to trade should have less spread, high volatility and stable movement. If you consider the factors we discussed above, you will see a tremendous change in your trading.
Lastly, with your good strategy you can profit consistently only if you choose to trade with discipline. Plan what you and trade what you plan. Good luck in your trading.