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Home Education Articles HOW DO YOU CHOOSE THE FOREX CURRENCY PAIRS TO TRADE IN?
HOW DO YOU CHOOSE THE FOREX CURRENCY PAIRS TO TRADE IN?

HOW DO YOU CHOOSE THE FOREX CURRENCYPAIRS TO TRADE IN?


While only a handful of currency pairs are available for people to trade in, choice of the pair to trade in has to be given careful thought as it has a direct influence on the success or failure that you expect. Perhaps one of the factors that could influence a new trader’s choice is the popularity of the certain currency pairings.

The majors

All currencies might be equal but in FX trading some are more equal than others. “The majors” is a term given to the currencies of the world’s strongest economies and they tend to be the most popular with FX traders. Seven currencies belong in this category and these are, in no specific order: the USD, the Euro (EUR), the Sterling pound (GBP), the Japanese Yen (JPY), the Swiss Franc (CHF), the Canadian Dollar (CAD) and the Australian Dollar (AUD). Any pair form these majors are heavily traded but the most popular pairing is the USD/EUR. So what determines pairing choice for a forex trader?

One of the critical considerations that a forex trader needs to look at is the liquidity of the pair. Currencies that are traded heavily are more liquid than those that are less active. The possibility of many trades and therefore profit is higher with such pairs. Moreover, liquid pairs tend to be more predictable than the less liquid ones. Some of the most liquid pairs include the USD/EUR and USD/GBP.

Another factor to consider is the spread of a pair – the difference between the asking and selling price of a currency pairing. Spread is measured in pips and the ideal pairing is the one with the lowest pip spread. The popularity of the USD/EUR pair is for the most part based on the fact that it has one of the lowest spreads in the market.

Stop-loss, take-profit and currency pairings

A basic strategy in FX trading is the setting of stop-loss and take-profit limits. To set these limits, it is important to know the trading ranges of the currency pairing you choose. Some pairs are more volatile than others and for a new trader, a pair that does not show fluctuations that are extreme is highly recommended.

Studying currencies before making a choice

The great thing about the FX market is that you are not stuck with the currency pair you start with. If you started with the USD/EUR pair, you might consider diversifying after a period of time. Settling on any pair should be guided by a careful analysis of the pair’s behavior. Factors to consider here include the volatility of the pair as well as the spreads.

The majors are popular because they are well known, they are predictable and are traded vigorously. It is for the same reason that less known and less traded currencies are shunned by most traders. It would be a great risk for a new trader to take on such currencies.