FX Pairs: Best Pair For Forex Trading
One of the biggest questions of a new forex trader is which are the best FX pairs to trade with. Pairs are always involved in forex because you are always trading one currency against another. You always have to sell one currency in order to buy another. If you think about it, it’s logical. You cannot buy dollars with dollars, you have to buy them by exchanging another currency for them. So that’s your pair – the dollar in this case, plus the other currency that you exchange for dollars.
There are around 150 currencies in the world. Most countries, however small, have their own currency, although many European countries use the euro and some countries use the US dollar. However, some of the minor currencies are pegged against the dollar, so that cuts down the number that you could trade.
Most traders would not get involved in 90% of the world currencies which are considered to be minor currencies not stable or liquid enough for serious trading. Certainly in the beginning it is wise for a new trader to stick to the major currencies.
Opinion on what constitutes a major currency may vary a little bit but generally there are 7 currencies considered major. These are the US dollar (USD), euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD) and Australian dollar (AUD). These in combination give 6 major FX pairs involving the US dollar:
EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD.
Of course it is possible also to trade cross pairs, that is pairs of the major currencies that do not involve the US dollar. However, the 6 major pairs account for 90% of the funds traded on the forex markets. The most traded pair is EUR/USD.
EUR/USD is probably the best pair for forex trading, especially for a beginner. Why? There are three main reasons.
First, there is very high liquidity in this market. This means that you will not have trouble getting matched and stops are likely to kick in at the right level which makes it more forgiving of errors.
Second, the popularity of the pair means that the spread (your cost) is smaller than for many other pairs.
Third, there is plenty of information about these currencies so you are likely to be able to keep on top of significant financial reports and events easily.
When you are starting out it is best to stick with one pair. Although it may seem that you will have more trading opportunities if you try to apply your system to several different pairs, in fact this quickly becomes confusing and stressful, and that is when mistakes are made. So unless you are using a forex robot which may be set up for another currency pair, most sources recommend taking EUR/USD and avoid trading any other FX pairs for the first few months at least.
September 13th, 2009 at 3:15 pm
[...] The difference from stock trading is that currencies do not have an absolute value but are always priced relative to another currency. When you buy or sell, you are in fact always exchanging one currency for another. This means that you will always deal in a pair of currencies, which might be the euro and the US dollar. This pair is usually written EUR/USD and it has the highest trading volume of any forex pair. [...]
September 30th, 2009 at 1:40 pm
[...] another major source of gold, even producing slightly more than Australia, the price of the AUD/USD currency pair is also closely correlated with the price of gold, other things being equal. This is because gold [...]
October 3rd, 2009 at 6:52 pm
[...] another. A common pair for beginners to use is EUR/USD, or the euro and US dollar. These are the most heavily traded pairs so costs are usually low and a lot of information is available, making it one of the easier and [...]