Definition of Forex Pairs
In Forex, the currency pair is the main trading instrument. Trading currency pairs, which allowed everyone to earn on the differences in exchange rates, had become relevant since the inception of the Forex market in 1978 when the IMF officially allowed national currencies to refuse binding to the dollar and gold reserves.
Currency Pairs, What Moves Them?
The Forex market is a decentralized market where the price of the currencies is determined by the available bid and ask price that is offered. There are many reasons responsible for the fluctuations in the market that cause the price of currency pairs to move up and down. These include macroeconomic factors like Government stability, geopolitical relationships, import and export rates, GDP, and interest rates.
How Do Currency Pairs Work?
At Forex, currency pairs are subject to a single rule - only two monetary units are always involved in trading, one is bought, and the other is sold. Different variants of interaction between national monetary units are impossible (but there are variants of exchange of money for other assets, for example - precious metals). This is also determined by ISO regulations. Let us distinguish at once between "direct" and "reverse" currency pairs. traight pairsS are all pairs where the rate is given in US dollars, New Zealand dollars, Australian dollars, or British pounds (in other words, the symbols for these currencies are on the right side). Inverse currency pairs - when the designation of the New Zealand, Australian, or US dollar, or pound sterling stands on the left (i.e., this currency is an object of purchase).
Correlation
All currencies are dependent on each other. For example, if you trade the British pound and the yuan (GBP/CNY), you are trading one of the branches of the GBP/USD and USD/CNY pairs.
These currencies are correlated as they are both linked to the USD. The ovement of currency pairsm is itself determined by many different factors: some currency pairs are moving in one direction, while others are moving in opposite directions.
In economics, correlation is a numerical expression of the relationship between two variables.
In our case, currency pair correlation is a numerical expression of the relationship between two currencies. Its coefficient ranges from -1 to +1. The value +1 indicates the movement of two currency pairs in the same direction, and -1 - if the pairs are moving in the opposite direction. In addition, the Forex correlation equal to zero indicates an arbitrary trend in the movement of currency pairs.
What Makes a Good Pair?
Liquidity
Forex liquidity refers to the ability of a currency pair to buy and sell without significantly affecting its exchange rate. A currency pair is said to have a high level of liquidity when it can be easily bought or sold, and there is a significant amount of trading activity for such a pair.
Volatility
Currency pair volatility is measured by calculating the standard deviation of returns. The standard deviation shows how much the values deviate from their mean (average).
The most volatile currency pairs have both advantages and disadvantages. The first advantage is obvious: the stronger the rate fluctuation, the more profit a trader can earn because the daily movements of a pair with high volatility can contain several daily movements of low-volatility pairs. However, in case of a losing position, there is a risk of losing more.
How Many CPs Should You Trade?
Every Forex currency pair has its nature, and every pair changes over time, so it's not certain that if one pair was profitable for you this year, it would be the same next year. Besides, a pair that suits you perfectly on one timeframe can turn out to be terrible on another one. That's why you should start by studying several pairs and each pair's peculiarities. By focusing on one currency pair, you lose a lot of opportunities, using which you can be guaranteed to make money. For example, if you apply a trading strategy on gaps, then it is clear that on five currency pairs, you will have more opportunities than on one. And more open transactions are, as a rule, more profits. The same rule also applies to the use of other strategies in which you have to wait for an opportune moment to open a deal.
The Optimal Number to Trade
Some Forex traders trade a few or even one pair all the time without changing anything, while others may use dozens of pairs in their strategy. It's all a matter of individual preference and your trading system.
But if you are new to Forex trading, it is better to start with 1-2 pairs and study them well. You can start with "classic" currency pairs like GBP/USD or EUR/USD.
The most predictable CPs:
- AUD/USD
- USD/JPY
- USD/CAD
- NZD/USD
- EUR/USD
Pairs Better to Avoid
Exotic currency pairs are the hardest to trade, especially for beginners. Usually, these pairs include the base currency (USD, EUR, AUD) and currencies of developing countries. Such pairs are usually low-liquid, have big spreads, and are hard to predict.
Examples: USD/ZAR, AUD/PLN, EUR/SGD, AUD/SGD, and many others.
Which Forex Pairs Pay the Most?
It is hard to find a currency pair more popular and liquid than EUR/USD. The US economy is the first in the world, and the EU economy is the second. In addition, even though the US and Europe are separated by an ocean, the volume of trade between them is tremendous.
What Time of the Day it’s Better to Trade?
Trading on the major Nasdaq Stock Market and New York Stock Exchange typically begins at 9:30 a.m. EST and ends at 4 p.m. EST.
The Major Trading Sessions
The Forex market often distinguishes three main sessions: New York, London, and Asia. However, there are four of them: usually, the Sydney and Tokyo sessions are referred to as the Asian sessions.
When it’s Better Not to Trade?
The Forex market often distinguishes three main sessions: New York, London, and Asia. However, there are four of them: usually, the Sydney and Tokyo sessions are referred to as the Asian sessions.
Start and the end of the week
The first 24 hours of each new week are usually relatively sluggish in terms of trading. Market participants have just returned to the trading floors after two weekends. On the other side is Friday. The last 24 hours of the trading week are often characterized by low liquidity. In addition, taking on new risks before the weekend is not a pleasant decision. After the weekend, even such a liquid market as Forex can open with a rather aggressive gap.
When you're tired or not in the mood
Effective trading requires mental discipline. Traders who know how to control their emotional state are successful. Those who can't control their own emotions become frustrated with trading. But no matter how disciplined and disciplined you are in keeping your emotions under control, there will always be days in the market when it's not easy to keep your temper in check. At such times it's better to rest and start trading with new energy and a cool head.
When is it better to Trade?
Most experienced traders prefer to trade from the opening bell until 11:30 a.m., a period of peak volume and volatility.
Top 10 most traded currency pairs
Most popular currency pairs include all the major ones, as well as several cross-currency pairs.
- EUR/USD
- USD/JPY
- GBP/USD
- AUD/USD
- USD/CAD
- USD/CHF
- NZD/USD
- EUR/JPY
- GBP/JPY
- EUR/GBP
Top 10 most traded currency pairs
Is it important to choose a reliable platform?
A trading platform is the main working tool of every trader, and it should be convenient and correspond to all innovative innovations in this sphere. Modern trading terminals allow you to carry out full-fledged analysis, make predictions about the market situation, and open transactions in real time.
But over the years of working in this field traders, have already made a list of objective parameters that should be paid attention to when choosing a trading terminal:
Software speed and platform performance. Low speed and poor performance are the main reasons for the incorrect display of quotes; Safety of all transactions and confidentiality of all operations made by a trader; Mobility of the terminal, i.e., software compatibility with various OS installed on mobile devices.
Conclusion
As a result of globalization, the world economy is becoming increasingly connected, and currencies are highly dependent on each other. And the more the economies of two countries are linked, the more their currencies correlate.
The task of determining the best currency pair is not feasible theoretically. Too many factors are involved, and many things change over time. The best solution is to study the market in practice. You can start with the most popular pairs, or you can take risks and try risky pairs. In the end, you will determine by yourself in a practical way which style suits you and which pairs you "feel" better.
But before you lose your money, try out the test modes on the demo platforms. And only after testing your strengths, and gaining experience, dove into the ocean of real trading.
Use the knowledge gained in this article to trade successfully!
by , 2022.09.29