There are certain currency pairs in the forex market that are traded more often than others, and there are various benefits to restricting yourself to trading with these pairs.
Despite the lesser known pairs having greater risk and reward, the more common pairs are generally more stable and easier to analyze.
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Here are the five most common currency pairs and what makes them so popular…
The EUR/USD pair is the most traded pair out there, unsurprisingly.
In general, the US Dollar is a major driving force of many of the most popular pairs, because of mass familiarity, and additional analysis covered. Then you have the Euro, a currency which has had substantial investment from its member countries, combined with free trade and enormous global investment interest.
EUR/USD operates inversely with USD/CHF and in tandem with GBP/USD, in general, which can be of valuable knowledge in the analysis of these pairs or when hedging. This currency pair is one of the most common for beginners and is often the default in practice trading. It is considered to be highly predictable. It tends to create triple tops in addition to reasonable breakouts and it’s breakouts have a tendency to last long enough for significant profit to be captured.
The United States and Japan are both major economic powers, which reflects in the volume and trading of their currencies.
USD/JPY represents a significant split between the east and the west, and consequently it tends to react sharply to world news and global situations. Often called the “gopher”, this currency pair can switch from relatively stable growth or loss to a highly volatile position quite suddenly. Both USD/CHF and USD/CAD tend to correlate along with USD/JPY. The issue with USD/JPY is that it tends to have no movement for long periods of time until some political event or announcement is made. When it does move it moves suddenly, but traders that are following primarily this currency pair may find little movement throughout the year.
Known as the “cable”, GBP/USD is one of the most stable pairs to trade, as there isn’t the political volatility of USD/JPY.
This is one of the best trades for those who are new to the market, as it does fluctuate but in relatively predictable fashions. GBP/USD tends to be opposed to USD/CHF while positively following EUR/USD. This is again largely due to the influence of USD, which factors into all major currency pairs. This pair does have fairly low liquidity and analysts believe it may experience higher volatility in the coming year.
The British pound is one of the oldest currencies in the world and has a significant and prestigious history. The London market is nearly as high volume and strong as the United States and Japan economies. When volatility does occur, it tends to have a sharp change which then returns to predictable stability. Thus support and resistance analysis tends to be very well used against GBP/USD. More extreme fluctuations are occurring within the market over time, which may make this currency even more profitable, if less predictable.
One of the least volatile of the popular currency pairs, USD/CAD tends to grow and fall slowly, making it a good hedge against other pairs such as GBP/USD, which it tends to work with inversely. Known as the loonies, this pair used to move along with USD fairly predictably, but since 2002 it has instead worked fairly inversely with USD, making it antagonistic; this reflects changes in Canada’s position in a global economy. There is a large amount of USD/CAD trading which contributes to a significant amount of liquidity in the market. Analysis of USD/CAD is often used to make other determinations of currency pairs throughout the market.
Known as the “Swissie”, USD/CHF tends to be particularly resilient to political issues, making it far less volatile in times of political turmoil.
The Swiss franc is known as a safe haven for foreign exchange traders. It will operate in opposition to GBP/USD for the most part, but there is little correlation to USD/JPY because of the political aspects. The Swissie is less liquid than EUR/USD but still more liquid than many other currency pairs. Many forex traders will switch to USD/CHF when there is increased volatility in other areas throughout the market, whether it be due to economic issues or caused through political events. The Swiss franc is known to be fairly neutral in terms of global news and economic turmoil.
Advantages of Trading the Major Currency Pairs
- Stability. Larger pairs have more volume and thus more stability and less volatility. They are less likely to oscillate wildly and thus easier to analyze and profit from. Stability can be a double edged sword because there are fewer opportunities but it is still easier for investors to predict, analyze, and anticipate. Many of the major currency pairs have long stretches of stability and brief periods of volatility, providing fairly predictable opportunities.
- Research. Significantly more research and analysis has been done on the major pairs. Individuals may feel adrift when they work with rare currency pairs because they don’t have the information or support to work with. There will be less help and advice when dealing with rare pairs overall. Popular currency pairs are often covered by forex signal services, tips, and advice, which will all give guidance to both new and intermediate investors.
- Support. Major currency pairs are supported by nearly every forex broker. Many forex brokers only support major pairs and rarer pairs may take some effort to find. Consequently, those who want to work with specific brokers may need to find out which pairs their broker supports before committing to analysis and strategy.
- Cost. Rarer currency pairs often have larger spreads and thus usually cost more to trade. Every trade will cost more, so more profit will be needed for successful trading. That being said, the risks can pay off in the event that a trader has a winning strategy with a specific pair. Spreads also depend on the broker, so there are mitigating factors. EUR/USD tends to have the lowest spreads and fees.
Working with common currency pairs isn’t essential for a forex trader, though it is better for a beginner. As a trader grows, there may be certain advantages to rarer pairs. Beginners may want to restrict themselves to trading via forex signals until they have enough analytical knowledge to understand the differences between pairs and are able to determine the best currency pairs for their trading psychology.