A common question for traders to ask is how do you find out which Forex currency pair is best to trade and which one to avoid. There are so many Forex currency pairs to choose from which means more trading opportunities. However, traders should limit themselves and only focus on those currency pairs that exhibit certain behaviors and characteristics.
There are specific traits of currency pairs you might want to focus on to give you an idea of which to trade, which one to avoid.
Major Currency Pairs vs. Exotic Currency Pairs
The major currency pairs are the world’s 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 pairs are considered to be some of the “majors” and represent the most important economies in the world.
The more trading volume a currency pair has, and the more traders trading the currency on the market, the more liquidity there will be. With this higher liquidity, transaction costs for your trade will be lower. This means a trader can make a lot of trades and can quickly exit those positions, without it costing too much to do so. In contrast, if you were trading some really obscure currency pair, you’re more likely to get a lousy price and it’s going to cost you considerably more in fees 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 true when choosing which currency pair to trade. When selecting a currency pair to trade, you should choose one that is moving in a clear and trending direction rather than choosing 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 positions. The figure above shows the distinction between a trending Forex pair and ranging Forex pair. If you want a refresher on different types of Forex charts, read our previous article on Understanding Forex Charts.
To be successful, 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 might not and you would do better trading a cross currency pair like EUR/GBP, GBP/JPY, EUR/JPY etc. Just because the pair is a major pair does not mean it should be traded – always look at the volatility and trend before jumping in.
Time and Currency Pairs
The time of day at which you are trading a specific currency pair is also important. Different currency pairs are traded at different times and they might not coincide with the times that you’re trading manually in front of your computer. As an example, the most profitable time to trade the US Dollar is when the New York Stock Exchange opens. This information alone should 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 other currency pairs. As another example, during the London session, it’s advised to focus more on GBP/USD and EUR/USD during the New York session. When both London and New York are open, you should focus on all of the majors as there is a lot of volatility and trading opportunities during these hours.
Ultimately, it’s important to choose a currency pair that suits the way you like to trade. The most important thing to remember is that today’s best currency pair to trade can easily change by tomorrow. It could be that things have changed so much that it might be wise to avoid trading that particular currency pair and instead trade another currency pair. Also, try to avoid exotic currency pairs (USD/TRY, USD/HUF), big spreads and low liquidity Forex pairs (EUR/PNL, GBP/ZAR) and those that move in a ranging market.