Trading on the currency exchange markets is similar to stock trading, with the exception that in Forex you don’t just invest in one currency on its own, but you invest in the value of one currency vs another currency, and that’s why we always talk about currency pairs.
Those who invest in the stock market acquire the shares which they believe will experience an increase in value in the future. Vice versa, they sell the shares which, according to them, will suffer a loss in value.
Those who trade Forex, on the other hand, do not buy shares but trade in currencies which, according to their forecasts, will gain an increase in the exchange rate compared to the other currency.
For example, when the Euro is deemed to begin to lose value against the dollar, the trader who owns the Dollar/Euro currency pair will sell Euros and buy Dollars.
Buying and Selling in Currency Pairs
So, we established that Forex trading is the simultaneous purchase of one currency and the sale of another. Currencies are traded through an intermediary or trader, and are traded in pairs.
When choosing the currency pair to trade, it’s important to keep in mind that the position of a certain currency in a pair is not random. In fact it is very important to detect whether it occupies the left or right place.
Usually the currency on the left in the pair is called the base currency, while the second, the right one is called the share currency.
The main difference between these two currencies is the preponderance that one has over the other. The share currency takes on a certain value in relation to the base currency, as if the base currency were its unit of measurement. We can say that the base currency provides a reference value.
Example: the Euro and US dollar (EUR/USD) or British Pound and Japanese Yen (GBP/JPY). For more basics on currency pairs in FOREX take a look at this video:
Predicting Currency Pair Movements
In Forex trading it is necessary to make very precise predictions regarding the values that currencies will take.
If it is expected that there will be a change within a currency pair relative to their values, it is good to know which currency will have the most favorable exchange rate relative to the other.
When trading the investor can assume two positions (behaviors):
The SHORT behavior;
The LONG behavior.
The investor takes a SHORT behavior when he deems it more fruitful to sell a certain currency as he expects that the latter may have a decrease in value in the future.
On the contrary, LONG behavior differs from SHORT behavior in that, since an increase in the value of a specific currency is expected, it will be purchased by the investor.
Imagine the currency pair constantly in an “arm wrestling” match, with each currency on its side of the table. Exchange rates fluctuate as a function of which currency is stronger at the moment.
The exchange rates of currencies undergo extremely rapid changes, which are much faster rates than those of the traditional stock market.
This happens because the value of a currency not only changes based on the variation that demand and supply undergo, but it is influenced by numerous other factors. Some of these may be the monetary policy of the countries that have adopted a certain currency and their stability.
The value of a currency can also change thanks to the power of the same traders who, convinced of the decrease or increase in value, begin to sell and acquire all the same currencies.
By doing so, there is an alteration of supply and demand which determines a new value of some currencies, thus guiding the behavior of other traders, causing a domino effect. All this is possible to occur in a very short period of time because the Forex market is always open and it is always possible to trade.
Best Forex Pairs to Trade
Main Currency Pairs
They are the currencies that are most traded thanks to the strength of the markets they represent. A country characterized by a profitable economy and above all by both political and social stability usually has a currency that is rarely subject to frequent and sudden ups and downs.
Definition: The Major Currency Pairs are the most liquid and widely traded currency pairs worldwide.
The currency pairs listed below are considered the majors. These pairs all contain the U.S. dollar (USD) on one side, and are the most frequently traded.
- EUR/USD – Euro is the main currency used in the Euro zone, while USD is the official currency of the United States but is also accepted pretty much worldwide. Referred to in Forex Terms as “euro dollar”
- USD/JPY – JPY refers to the Japanese YEN which is the official currency in Japan. Referred to in Forex Terms as “dollar yen”
- GBP/USD – GBP is the Great British Pound and is the official currency in the United Kingdom. This pair is referred to in Forex Terms as “pound dollar”
- USD/CHF – Confoederatio Helvetica Franc (CHF), is the abbreviation for the Swiss Franc which is the official currency of Switzerland and also Liechtenstein. This currency is considered one of the main currencies because it is very stable and due to the strong Financial System under the Swiss Government. This pair is referred to in Forex Terms as “dollar swissy”
- USD/CAD – Another major pair is the US Dollar and Canadian Dollar which is referred to in Forex Terms as “dollar loonie”
- AUD/USD – The Australian Dollar (AUD) is the official currency in Australia. Referred to in Forex Terms as “aussie dollar”
- NZD/USD – The New Zealand Dollar (NZD) is the official currency in New Zealand. This currency pair is referred to in Forex Terms as “kiwi dollar”
Minor Currency Pairs called ‘Crosses’
Currency pairs that do not have the US dollar (USD) in them, are known as cross currency pairs or simply “crosses”. The main crosses are also known as “minor”. The most actively traded crosses are derived from three major currencies in the absence of the USD, and these are: EUR, JPY, and GBP.
- EUR/CHF – Referred to in Forex Terms as “euro swissy”
- EUR/GBP – Referred to in Forex Terms as “euro pound”
- EUR/CAD – Referred to in Forex Terms as “euro loonie”
- EUR/AUD – Referred to in Forex Terms as “euro aussie”
- EUR/NZD – Referred to in Forex Terms as “euro kiwi”
- EUR/JPY – Referred to in FX Terms as “euro yen” or “yuppy”
- GBP/JPY – Referred to in FX Terms as “pound yen” or “guppy”
- CHF/JPY – Referred to in FX Terms as “swissy yen”
- CAD/JPY – Referred to in FX Terms as “loonie yen”
- AUD/JPY – Referred to in FX Terms as “aussie yen”
- NZD/JPY – Referred to in FX Terms as “kiwi yen”
- GBP/CHF – Referred to in FX Terms as “pound swissy”
- GBP/AUD – Referred to in FX Terms as “pound aussie”
- GBP/CAD – Referred to in FX Terms as “pound loonie”
- GBP/NZD – Referred to in FX Terms as “pound kiwi”
- AUD/CHF – Referred to in FX Terms as “aussie swissy”
- AUD/CAD – Referred to in FX Terms as “aussie loonie”
- AUD/NZD – Referred to in FX Terms as “aussie kiwi”
- CAD/CHF – Referred to in FX Terms as “loonie swissy”
- NZD/CHF – Referred to in FX Terms as “kiwi swissy”
- NZD/CAD – Referred to in FX Terms as “kiwi loonie”
Exotic Currency Pairs
Exotic currency pairs are not belly dancers. Exotic currency pairs are made up of an important currency paired with the currency of an emerging economy such as, Brazil, Mexico, or Hungary.
By emerging economy we are referring to the economy of all those countries that have appeared very late on the panorama of the world economy. They are therefore countries that do not enjoy the same properties as, for example, a wealthy European country, but a country that is barely taking its first steps in a reality much larger than itself.
Exotic currencies however also refer to those countries that are very small compared to the others, which however have a very strong economy. One of these countries that is often taken as an example is Luxembourg.
Pairs made up of exotic currencies are not traded as frequently as major or minor pairs. For this reason, the transactions costs of trading for these couples can often be higher than that of the major or minor currency pairs (crosses) due to the lower liquidity of these markets.
The following are some examples of exotic currency pairs.
- USD/HKD – USD vs Hong Kong Dollar
- USD/SGD – USD vs Singapore Dollar
- USD/ZAR – USD vs South African Rand. Referred to in FX Terms as “dollar rand”
- USD/THB – USD vs Thai Baht, the official currency of Thailand. Referred to in FX Terms as “dollar baht”
- USD/MXN – USD vs Mexican Peso. Referred to in FX Terms as “dollar peso”
- USD/DKK – USD vs Danish Kroner, the official currency of Denmark, Greenland and the Faroe Islands. Referred to in FX Terms as “dollar krone”
- USD/SEK – USD vs Swedish Kronor, the official currency of Sweden, also written as Kr.
- USD/NOK – USD vs Norwegian Krone, the official currency of Norway.
It is not uncommon to see the spreads related to these pairs being two or three times higher than those of the EUR / USD or USD / JPY pairs. So if you want to trade in exotic currency pairs, it’s good to keep this in mind and include it in your risk assessment.
In my opinion the most profitable Forex Trading opportunities are offered by the swings made with the main currency pairs such as EUR USD, USD JPY, USD CAD. I personally am mainly trade on these, maybe because I got used to them and know them well, having been focused on these for quite a few years I feel I start at an advantage when trading these major currency pairs.
I have to say that recently I did get out of my comfort zone and also experimented with exotic currency pairs, however I still don’t feel ready enough to invest a large capital.
As a recommendation I would say that if you’re a beginner you should concentrate first on the major currency pairs and the crosses. Get familiar with these currencies first as they give you the biggest opportunity of constant trade wins. Once you have a good grasp of these you might want to mix it up a bit and start trading with exotic currency pairs. Good opportunity can lie in these pairs for some big profits but they are few and far between and remember that the transaction charges for these are much higher.