How do you find out which Forex currency pair is best to trade and which one to avoid? This is a very common question all traders ask. There are many Forex currency pairs to choose from and this which means more trading opportunities, however, you’ll have to limit yourself and only trade and focus on those currency pairs that exhibit certain behaviors and characteristics.
Going forward, we’re going to elaborate more on the specific traits of the Forex currency pair you might want to focus more on and which one to avoid.
Major Currency Pairs vs. Exotic Currency Pairs
The major currency pairs are the most important currencies because of the volume traded and because they are the most frequently traded. The EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD are considered to be some of the “majors”. These are the most important economies in the world.
The more volume you have and the more people you have the more liquidity you have and the lower your transaction costs will be. This means you can make a lot of trades and you can quickly exit those positions and it won’t cost you much to do that whereas if you were trading some really obscure currency, first of all, you’re more likely to get a lousy price and secondly it’s going to cost you more to do the same amounts of trades.
Trading Currency Pairs vs. Ranging Currency Pairs
“The trend is your friend” is an old saying that holds much truth especially when choosing which currency pair to trade. You want to select a currency pair that is moving in a clear trend versus a currency pair that is moving in a ranging market. A currency pair that is trending means more opportunities for you to buy and sell those particular Forex pairs. The figure above shows the distinction between a trending Forex pair and ranging Forex pair. If you want to explore more on the different types of Forex charts read our previous article Understanding Forex Charts.
You want to be trading high volatility and trending pairs, the enemy of any Forex trader is a low volatility and choppy sideways consolidation. Sometimes the majors will offer you great trends and other times they don’t and you might be better off trading a cross currency pair like EUR/GBP, GBP/JPY, EUR/JPY etc.
Time and Currency Pairs
Another very important aspect of Forex currency trading is the time of trading because certain currency pairs are traded at different times and it might not coincide with the times that you’re trading manually in front of your computer. As an example, the most profitable time in the Forex markets for the US Dollar is when the New York Stock Exchange opens up so that will have an impact on when you decide to trade that particular currency pair.
During the Asia session, it’s recommended to focus on AUD/USD, NZD/USD or USD/JPY and avoid the rest of the currency pairs. As another example, during the London session, it’s advised to focus more on GBP/USD and EUR/USD while during the New York session when it’s overlapping with the London session you can focus on all of the majors.
In summary, it’s important to choose a currency pair that kind of suits the way you like to trade. The most important thing to remember is that what is today’s best currency pair to trade, tomorrow things can change and it might be the case you’ll have to avoid trading that particular currency pair and instead trade another currency pair. Try also to avoid those exotic currency pairs (USD/TRY, USD/HUF), big spread and low liquidity Forex pairs (EUR/PNL, GBP/ZAR) and those that move in a ranging market.