One of the important questions that new traders often ask is what are the best currency pairs to trade in Forex. Are there really best currency pairs in Forex or all of them just have equal value? There are of course some widely traded pairs in Forex and they do carry higher volume. This also makes those pairs more liquid.
While understanding the best currency pairs to trade, we should also learn about currency correlations. For example, EUR/USD and GBP/USD are positively correlated. This means, if you see a downtrend in EUR/USD, you will most likely see a downtrend in GBP/USD too. So, if you trade both pairs at the same time, you are doubling your risk. In this scenario, even if both are one of the best currency pairs to trade, you should always pick one of the two.
Similarly, EUR/USD and USD/CHF have a negative correlation. So if you see an uptrend in EUR/USD, you will most likely see a downtrend in USD/CHF. This means that if you go long on EUR/USD, then going short in USD/CHF will double the risk. Even though both pairs are major pairs and thus one of the best currency pairs to trade, you should always trade after understanding this correlation. Let us go ahead and look at some of the popular and best currency pairs to trade in Forex.
EUR/USD is the most widely traded pair among all currency pairs in the market. So many traders are interested in observing how EUR/USD moves. EUR/USD covers about 27% of Forex trading volume. We already saw how EUR/USD is positively correlated with GBP/USD and negatively correlated with USD/CHF. This is because of the positive correlation of the Euro, British pound and Swiss Franc. EUR/USD not only has the highest liquidity but is also one of the most predictable currency pairs in Forex. All of this makes EUR/USD one of the best currency pairs to trade in Forex.
The high predictability is because of the fact that the economies of the US and European Union are among the most transparent in the world. The price of EUR/USD is very sensitive to the news. So it is recommended to analyze the economic data very carefully while trading EUR/USD. The most important market movers for this pair are the monetary policy of the US Federal Reserve and the European Central Bank and the difference in key interest rates by the FRS and the ECB.
USD/JPY is the top currency of the Asian trading session. It is also the second most actively traded pair next to EUR/USD. Yen, the official currency of Japan actually lost a large amount of its value after World War II. But it became stabilized a lot in the following decades after the war. USD/JPY has a positive correlation with both USD/CHF and USD/CAD. So, if you are trading USD/JPY, trading USD/CHF or USD/CAD at the same time will double your risk. USD/JPY accounts for 17% of transactions in the Forex market.
Since USD/JPY has high liquidity, it is also one of the most predictable currency in the market and one of the best currency pairs to trade. Since the value of the Japanese Yen sees a number of daily fluctuations, it also has high volatility. Experienced traders can take advantage of this while new traders should exercise caution. The pair is also very sensitive to the release of major economic data. USD/JPY is best to trade during the Asian session when its liquidity is at its peak.
GBP/USD bags the third place in the liquidity competition after EUR/USD and USD/JPY. It is undoubtedly one of the best currency pairs to trade. As we saw earlier, there is a positive correlation between the British Pound, the Swiss Franc, and the Euro. Because of this, it has a negative correlation with the USD/CHF and a positive correlation to the EUR/USD.
GBP/USD accounts for about 12% of the total trading volume in the Forex market. If you are a short term or aggressive trader, this pair is a good choice for you. Because GBP/USD is highly volatile and highly unstable too. While trading this pair, it is important to look out for the economic data related to the British or the US economy.
USD/CAD is one of the commodity currency pairs as Canada depends on the export of many raw materials for the income. It is true of the oil exportation in particular. It has much lesser liquidity than the three pairs that we saw earlier. Since Canada is a neighbor of the USA and is one of its trading partners, the values of the US and the Candian dollar are closely related.
Since the price of the oil is closely related to the value of the Canadian dollar, it is important to watch the price of the oil. USD/CAD also has a negative correlation with the AUD/USD, GBP/USD and EUR/USD. This is because of the fact that all these currencies have the US dollar as the base currency.
The Swiss Franc or CHF is the official currency and legal tender of Switzerland. Switzerland has a stable financial and political position. Hence, this pair is a safe-haven for traders all over the world. Traders invest in CHF to stay safe during the time of financial turmoil. Switzerland also has a low rate of inflation.
USD/CHF has a negative correlation with the EUR/USD and GBP/USD. Employment data and gross domestic product (GDP) released by both the USA and Switzerland have a great impact on the movement of this pair. The interest rate differential between the Federal Reserve (Fed) and the Swiss National Bank (SNB) is also something that needs to be watched, as it affects the price movement. USD/CHF is one of the best currency pairs to trade mainly because of the safety that it offers.