One of the major decisions that a Forex trader has to make is which currency pair to trade. Choosing the right pair can spell the difference between being profitable and losing money on a trade. There are three main categories of currency pairs.
This category covers the most traded pairs on the currency markets, which include the US dollar as one of the currencies paired. These include the EUR/USD, GBP/USD and USD/JPY, which are the three most traded pairs, accounting for the majority of total volume traded in the markets. Also included among the majors are the AUD/USD, USD/CHF, USD/CAD and the NZD/USD.
There are many reasons why you should choose to trade these pairs. Since they enjoy high trading volumes, they are very liquid. This ensures that you will be able to make money from price changes. In addition, the majority of trading activity for these pairs happens during New York trading hours, since they include the US dollar. These are the best choice for traders who are starting out since a lot of trading strategies are available for them.
These are paired currencies that do not include the US dollar. Examples of cross pairs include AUD/CAD, CAD/JPY, EUR/CAD and GBP/JPY. The main benefit of trading these currency pairs is that you can combine strong and weak currencies in order to maximize your potential profits. For example, if you think the value of the UK pound will increase in the near future, you might want to couple it with a currency that you believe will weaken, such as the Canadian dollar. Thus, they increase your trading opportunities, if you are experienced enough to take advantage of them.
These are pairs that consist of currencies from developing countries such as Turkey and South Africa. Examples of these pairs are the USD/ZAR (South African rand), USD/BRL (Brazilian real) and USD/MXN (Mexican peso). While trading these pairs can provide you with a lot of trading opportunities not available with other types of pairs, they can also be risky. In addition, they require a lot of analysis before you can identify a trade.
For these reasons, trading exotic pairs is not recommended for those Forex traders who are starting out. Instead, you should only consider them once you have gained a lot of experience and knowledge, and feel ready to perform the analysis required.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer