For newcomers who enter the forex market, one of the first lessons they must learn is about the currency pairs they plan to trade with. The trading instruments in the global currency market are international currencies that are paired together. Their volatile nature gives rise to the risks and rewards in the form of profits. Hence, having a clear idea about various currency pairs is crucial for carrying out trades as a professional. For that, you can take the help of a demo account, which simulates a real trading environment, but you don’t have to worry about risking real money. So you can deeply understand the movement of different currency pairs. But let’s leave that for later; now is the time to discuss the top currency pairs and some useful tips you can follow for trading them like a pro.
Things to know about Currency Pairs
Let’s start by decoding the actual meaning of currency pairs. As mentioned above, currency pairs are the default trading instruments in the forex market, and the exchange rate differences will determine the price at which you buy or sell these pairs. A currency pair is formed of 2 currencies, and the price is stated as the value of the first or base currency compared to the value of the 2nd currency against which it is being quoted. For example, the price of the GBP/USD pair will depend on the value of the British Pound compared to the value of the US Dollar.
Another thing to know about currency pairs is that there are three main types. The most popular types are those with high trading volume and liquidity, called ‘Major pairs.’ Currencies related to major economies like Canada, the UK, Australia, New Zealand, Japan, and Europe will come under Major pairs. Still, they must be paired with the US Dollar, the world’s reserve currency. The 2nd type is minor currency pairs or cross pairs, which don’t have USD but will include other major currencies paired together. EUR/GBP can be cited as a perfect example of a minor currency pair.
The 3rd and last type is exotic currency pairs, which have this interesting combo of major currencies paired with the currencies of developing economies, making them extremely volatile and unpredictable. To mention an example of exotic pairs, USD/SGD is a good one. The exotic pairs are also the least liquid pairs as they have a lower trade volume due to their risky nature.
Top 6 Currency Pairs
We will look at the top 6 currency pairs based on 2022’s BIS Triennial report. These currency pairs are in the top 6 list as they were the most popularly traded pairs last year, and over 60% of trading volume was generated by these pairs.
- EUR/USD – The EUR/USD remained the most traded currency pair, forming 23% of total trading volumes in the last year. The haven of traders is the first choice of millions of traders due to thin spreads and high liquidity. So, I will recommend this pair as an ideal starting point for beginners entering the forex market for the first time.
- USD/JPY- The second spot is secured by the US Dollar and Japanese Yen pair, which is also very popular among traders due to the good number of trading opportunities it gives with the strong USD.
- GBP/USD- The third most traded pair of 2022 is the cable pair, which is popular for its volatile nature. Hence, the British Pound pair is more of a fit for traders with enough experience as it requires a higher margin than other majors.
- AUD/USD- The 4rth most traded pair is the classic Aussie Dollar pair, which is also a favorite for many traders.
- USD/CHF- The fifth favorite pair of forex traders in 2022 was the US Dollar quoted against the Swiss Franc, generating a decent volume of trade.
- USD/CAD- The 6th pair completing this list is the US Dollar quoted against the Canadian Dollar, which is also being traded by many due to the profit potential.
Tips for Trading The Best Currency Pairs
- Learn about market trends and technical analysis – The first tip for trading the best currency pairs is to take some time to learn about the market trends and their impact on various currency pairs. Spotting these trends and turning them into trading opportunities is impossible without some knowledge of technical analysis.
Fundamental analysis is sometimes useful but tells more about long-term than short-term trends. So, for traders into trading styles like scalping, day trading, or even swing trading, being well-versed in technical analysis is necessary for understanding the nature of different currency pairs.
The essence of technical analysis is price action, and learning about it can prepare you for trading as a beginner. Price action is the foundation for all popular trading strategies, and most traders use it as a basis for spotting trading opportunities. So, please take your time to learn chart reading and detailed technical analysis.
- Choosing the best currency pairs for yourself – When it comes to beginners, they are always advised to start trading with one major pair as they are the easiest to grasp. As we mentioned before, the EUR/USD pair can be an apt trading instrument for a beginner in the forex world.
But when you gather more experience, you will want to diversify and trade with more than one pair. Here, you should choose the pairs that align with your trading style and strategy and provide favorable conditions based on the current market situation.
- Learn about the correlation between currency pairs – One thing distinguishing currency pairs from other asset classes is that different currency pairs are often correlated. This correlation either makes them move in the very same direction or the opposite direction to one another. Traders who don’t know about the correlation between currency pairs are prone to making costly mistakes in trading.
We often see that beginners choose highly correlated pairs without knowledge, which is not the best approach for trading. Hence, you should also learn about the correlation between different currency pairs, as trading correlated pairs can either add up to the risk or reduce it based on how you do it.
- Trade Demo account first – As discussed in the beginning, you should practice trading with any currency pair in a demo account. You can easily open one on MT4, a beginner-friendly platform, or MT5, used by advanced traders or those who want to trade different instruments. Here, you can freely explore and experiment with different pairs without worrying about risk and losses. A demo account is an ideal tool for testing your strategy on different currency pairs, and then you can choose the best ones for live trading later on.
Most forex brokers give free access to their demo account once you complete the simple registration process. All currency pairs supported on their live or real trading account will also be available on the demo account. So, you can freely trade with them using virtual funds and enhance your skills before trading for real.
- Implementing risk management techniques- Another thing that you need to consider while choosing and trading with different currency pairs is the risk that you are taking. Traders with a low tolerance for risk should never choose an exotic pair to trade as they are inherently risky. The currency pairs you choose must be a match with your risk profile.
It would be best to practice common risk management techniques, such as placing a stop loss and using appropriate position sizes for trades. When you are trading with a pair that is too risky or volatile at the moment, the size of the position must be adjusted based on your risk appetite.
- Using Trading Calculators – The last tip I can give you for trading with different currency pairs is to use trading calculators for calculating different values related to your trades. Trading with different currency pairs requires many simple and complex calculations, which take much time if done manually. The chances of mistakes are also higher when you manually calculate all trade-related metrics, which is risky while trading on a real account.
So, you can rely on trading calculators for precise and instant results. Usually, a complete set of trading calculators performs functions like currency conversion, pip value calculation, profit & loss calculation, position size calculation, and more. So, you should find a free platform that gives access to different trading calculators and use them well to make better trading decisions.
In summary, trading with the top currency pairs is not enough to succeed as a trader, as the results depend on your knowledge about these pairs and your skills to execute your strategy at the right time and at the right price.