Forex trading is the process of buying and selling currencies with the goal of generating a profit within a short period.
To a large extent, most people are indirect forex traders or investors. For example, the Turkish lira has plunged in the past decades. As such, holders of the lira have actually lost money since their purchasing power has been eroded.
Forex trading is made possible by brokers, who provide hundreds of currency pairs to their customers. These customers can then buy and sell the currency pairs and exit at a profit.
In the past, the field of forex trading was a reserve to the big banks like Goldman Sachs and Morgan Stanley. These are the people who could afford the technology and the fees to exchange the currencies.
Today, with all areas having access to technology, the industry has seen exponential growth. People from rich countries like the United States and those from poor countries like Zimbabwe are participating in this trade.
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Types of currency pairs
There are three main types of currency pairs that you can trade. First, there are forex majors, which are the most liquid. The currency pair is made up of the US dollar and developed country currencies like the euro, pound, and the Swiss franc. These currencies are the most liquid and are the cheapest to trade.
Second, there are forex minors, which are made up of developed country currencies excluding the dollar. Some of the most popular forex minors are EUR/GBP, GBP/AUD, and EUR/JPY among others.
Finally, there are currency exotics, which are made of developed and emerging market currencies. Examples of the most popular exotic pairs are USD/TRY and EUR/ZAR. These currency pairs are known for being volatile and expensive to trade.
Qualities of the best forex pairs to day trade
There are hundreds of currency pairs that are provided to day traders. However, we recommend that you should focus on a handful of pairs. Some of the most important qualities to look at are:
Tight spreads
Forex brokers don’t charge a commission to day traders. Instead, they make money through spread, which looks at the difference between the bid and ask price of a currency pair.
Highly liquid currency pairs tend to have thinner spreads compared to exotics and minors.
Liquidity
Liquidity is another important metric to consider when looking at the best pairs to day trade. It is defined as the ease of coonverting a financial asset into ready cash. In most cases, forex majors like the EUR/USD and GBP/USD pairs are usually seen as more liquid pairs. This means that a trade willl be executed almost instantly.
Some currency pairs like GBP/TRY and ZAR/BRL are highly illiquid, meaning that a trade can take several minutes before it is executed. Therefore, we recommend that you go for highly liquid currency pairs liquid currencies that are also cheap to trade.
The overlapping of two different sessions (such as European and American, or Asian and European), also play a key role in this.
News and data
News plays an important part in the financial market. In most cases, currency pairs that move rapidly are those that have some underlying news stories.
For example, the US dollar tends to move fast when there are important news like the Federal Reserve decision or non-farm payrolls data. You should trade developed country currencies that have regular news.
How to become a great currencies trader?
To become a successful currencies trader, you need to understand the dynamics about these currencies. You need to understand their economies and the factors that affect their movements.
Obviously, this means that some currency pairs are difficult to trade because most traders don’t focus on them. So, here are the best currency pairs you should try.
→ Understanding and maximizing currency correlations
EUR/USD
This is the most traded currency pair in the world. Traders love the pair because of the available news, its activeness, and its liquidity.
For example, in most days, traders receive data from either the EU or the EU countries and from the United States. By having all this data, they can make solid decisions on how to enter or leave the trades.
→ Our Guide (and resources) for News Trading
GBP/USD
This is the pair between the Great Britain Pound and the dollar. The pair is the third mostly traded currency in the world.
Traders love it because of its liquidity and the access to financial news. Like the US, Britain regularly releases regular economic data, which is very important in helping traders make decisions on entry or exit from trades.
The pair is commonly known as ‘The Cable‘.
EUR/GBP
This is a pair between the Euro and the pound. The relationship between Europe and the EU is about to get interesting because of the Brexit effects.
Nonetheless, the two will remain related and committed because of the historical trade ties that exist between the two. Because of the regular flow of information from these two, you should give the pair a try.
USD/CAD
Canada is the third most important trading partner of the United States. The two countries share a border and are the most successful North American countries.
Every day, trade worth tens of billions of dollars cross the border of the two countries!
In addition, Canada is one of the most endowed countries in terms of natural resources. A combination of all these factors make the pair one of the most liquid in the world.
USD/ZAR
This is a pair made between the dollar and the South African rand. Think about it: South Africa is the largest economy in Africa.
In the past, the country has seen major mismanagement by the current president, Jacob Zuma. Early in 2018, the party nominated Cyril Ramaphosa, a successful entrepreneur who founded a company called Shanduka, to become the party chairman. He is also seen as being incorruptible.
Therefore, in the past two years this pair was be a bit volatile, which is a good thing for traders.
→ How to Trade in Periods of High Volatility
AUD/USD
Australia is one of the most blessed countries in the world in terms of resources. The country has vast deposits of gold, silver, copper, and diamonds. Like the other currencies we have mentioned, Australia regularly publishes financial news and data which makes the pair very interesting to traders.
As a trader, you should avoid currencies of countries like Poland, Denmark, and Norway because of the difficulty of finding the news about their countries.
→ TIP: Discover How to Diversify a Currency Trading Portfolio
You can also Trade Forex and Currencies with our platfom
External Useful Resources
- Cable (foreign exchange) – Wikipedia
- Which Currency Pairs Should I Trade? – DailyForex