Forex Currency Pairs

If you are new to forex trading you might have heard the term forex pairs or currency pairs. What exactly is the meaning of this forex term. Lets us learn about forex pairs today.

What is a Forex Pair and What are the major Currency Pairs to Trade?

A forex currency pair is the two different currencies in which you are doing the forex trading. Let’s say, you are trading US dollars for Japanese yen, then your forex currency pair is USD/JPY. In every currency trade there is a Forex pair involved.

In theory forex trading is possible in any two currencies listed on forex markets. Most of the forex software programs like FAP Turbo and currency trading systems like LMT Forex Formula supports various currencies. However in real life most currency trading is done in currencies of the big powers like United States. This does not mean the largest or most politically powerful nations. By big powers I mean the world’s leading economic powers. For example Switzerland is a tiny nation but is a key player in the fiscal markets because of the international significance of the Swiss banks. On the other hand though China is an emerging economic power, there is less demand for Chinese Yuan among forex traders.

Almost 90 % of the investments traded on the foreign exchange markets are done in nine key forex pairs. These currency pairs are,

• EUR/USD Currency Pair: Euro and US dollar.
• USD/JPY Currency Pair: the US dollar and Japanese yen.
• GBP/USD Currency Pair: British pound and US dollar, which also got a nickname called Cable since it used to be coordinated on both sides by a cable running under the Atlantic Ocean.
• USD/CHF Currency Pair: the US dollar and Swiss franc.
• USD/CAD Currency Pair: the US dollar and Canadian dollar.
• AUD/USD Currency Pair: the Australian dollar and US dollar.

Many traders also do the trading in further combinations of these major forex currencies. They are,

As you can see you don’t have to have US dollars in all the forex currency pairs. Though NZD (New Zealand Dollar) is not a major currency in forex market some traders also get involved in NZD/USD currency pair since it has low spread and fairly easy to predict. Nevertheless if you are new to currency trading it is always best to stick with the major currency pairs.

Without doubt, the US dollar is the most important currency in forex market. According to a study conducted in 2007 approximately 84% of trades were in done in US dollars. The Euro is positioned in the second place with 37% of trading. You might be wondering why these numbers add up to more than 100%. This is due to the fact that there are always two forex currencies in every currency trade. The Japanese Yen, British pound, Swiss franc, Australian Dollar and Canadian Dollar are just behind US$ and Euro in the respective order.

What Is the Best Forex Pair For a Currency Trading Beginner?

The best currency pair for a beginner is EUR/USD pair. Lot of experts agrees on this because of high liquidity outcome in a smaller spread and as a result your costs will be lower. Also it is easy to trade in EUR/USD forex pair since you will always find plenty of information about these forex currencies on internet as well as other resources.

On the other hand beginners should try to avoid currency pairs which requires in depth knowledge to make profit from trading. Example, the EUR/JPY forex pair might move upwards very slowly but could go down few pips in a matter of days. Some of the other currencies like Canadian Dollar have specific characteristics. For instance the price of oil has big influence on the rate of CAD or Canadian dollar since Canada is an oil exporter. And you know the recent fluctuations in oil market which can result volatility of CAD. Conversely Japan is one of the biggest consumers of oil and they import large quantity of oil. Naturally when the oil prices changes the Japanese yen can also be affected but in the opposite direction.

In summary when you are a beginner it is best to start trading in EUR/USD currency for the initial few months. The next forex pair you should consider is the GBP/USD pair. Do not make the mistake of trying to trade too many currency pairs initially or else you will end up with losses.

This entry was posted on Automated Forex Trading on May 27, 2009 at 12:35 am and is published under Learn Forex Trading. Both comments and pings are currently closed.