Determining the Best Forex Currency Pairs

Trading currencies involve forex currency pairs which are the two currencies you use to trade. To illustrate, the currency pair is EUR/USD in a trade involving Euros for US dollars.

In forex trading, any of the worlds currencies can be used. Real world trading though, confines itself to a subset that includes only the currency of the major financial power players. Note that a nations financial power has no direct bearing on the actual physical size of the nation nor its political power. Switzerland is a good case in point of large power emanating from relatively small land masses. In this case, the power of Switzerland is a direct result of the global significance of their banks.

Six major currency pairs account are involved in 90% of the trading in foreign exchange markets, namely:

- USD/CHF: the US dollar and Swiss franc.

- EUR/USD: the euro and US dollar.

- GBP/USD: the British pound and US dollar. Bit of trivia, the nickname of this pair is “Cable” derived from the fact that an undersea cable in the Atlantic, was utilized for synchronizing them.

- USD/CAD: the US dollar and Canadian dollar.

- USD/JPY: the US dollar and Japanese yen.

- AUD/USD: the Australian dollar and US dollar.

While other currency pairs are used by other traders, some involving the New Zealand dollar, limiting their trading to the major powers shown above is recommended for new traders.

Among the majors, the US dollar stands as the most prolific in light of a 2007 study that showed that 85 percent of the trading done involved the USD. Second place at 37% is the euro and following it in order are the yen, pound, Swiss franc, AUD and CAD. Note that they will never add up to 100% because all the trades involve currency pairs.

So What Currency Pair is Best for Beginners?

The consensus of experts in this matter is the EUR/USD is the currency of choice for beginners because of the voluminouse data available about these currencies. Furthermore, smaller spreads are produced by the high liquidities involved thus trading costs will be relatively low.

Moreover, trading certain currencies require specialized knowledge from those wishing to trade them effectively. Case in point is the Canadian dollar. Since Canada is a significant exporter of oil, the world market price of oil will have a direct bearing on the value of their currency as well. At the other end of the spectrum is the case of Japanese yen which is influenced in a major way by oil prices due to the fact that Japan consumes and imports a lot of oil.

At the start also, it is best to avoid trading with a large variety of currencies. Starting with the EUR/USD first for a couple of months is advisable. After this, the general trend for traders who are just sharpening their skills is to include the GBP/USD currency pair in their trading portfolio.