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How to Choose Which Forex Pair to Trade?

Tobi Opeyemi Amure
Reviewed by:
How to Choose Which Forex Pair to Trade?

In a nutshell, to choose which forex pair to trade, assess market liquidity, volatility, and economic indicators relevant to the currencies in question. Align your choice with your trading strategy, risk tolerance, and the current geopolitical and economic environment to optimise trading outcomes.

Deciding on how to choose which forex pair to trade can seem daunting, but I’ve put together a guide to simplify this process for you.

By understanding the factors that influence currency movements, you’ll be equipped to make informed decisions, transforming complexity into clarity in your trading journey.

This article was reviewed by Tobi Opeyemi Amure, a trading expert and writer at Investopedia, Investing.com, and Trading.biz.

Understanding Forex Trading

Before we dive into choosing a currency pair, let’s remind ourselves what forex trading is to ensure we all are on the same page.

Essentially, forex trading involves the buying and selling of fiat currencies on the foreign exchange market. It’s like a global marketplace where different currencies are traded against each other.

Traders aim to profit from exchange rate changes, buy a currency hoping its value will rise, or sell it if they anticipate a decline. 

Note that currencies in pairs have different levels of volatility, meaning that some are low while others are high.

As a forex trader, it is crucial to conduct extensive market analysis before choosing a forex pair.

This way, you can easily identify an option that meets both your short and long-term financial goals. 

What Are Forex Currency Pairs?

A forex currency pair consists of two fiat currencies traded against each other, representing the relative value of one currency against the other.

Each pair has a base and a quote currency, with the exchange rate indicating how much of the quote currency is required to buy/acquire one unit of the base currency.

For instance, in the EUR/USD pair, the euro is considered the base currency, while the US dollar is the quote currency.

If the EUR/USD exchange rate is 1.50, it means that 1 euro is equivalent to 1.50 US dollars.

Types of Currency Pairs

Currency pairs come in different forms, and understanding them can help you effectively strategise.

Note that forex pairs categorise currencies based on their trading volumes, liquidity, and underlying economic factors.

See below the 3 types of currency pairs you should be aware of. 

Types of forex currency pairs.
Types of Forex Currency Pairs

Major Pairs

Major currency pairs are the most common and heavily traded pairs in the forex market.

They consist of currencies from the world’s most influential economies, typically paired with the US dollar (USD).

The major pairs include:

  • EUR/USD (Euro/US Dollar)
  • USD/JPY (US Dollar/Japanese Yen)
  • GBP/USD (British Pound/US Dollar)
  • AUD/USD (Australian Dollar/US Dollar)
  • USD/CHF (US Dollar/Swiss Franc)
  • USD/CAD (US Dollar/Canadian Dollar)
  • NZD/USD (New Zealand Dollar/US Dollar)

Major pairs offer high liquidity, tight spreads, and ample trading opportunities, making them ideal for both novice and experienced traders.

Minor Pairs 

Also known as cross-currency pairs, minor pairs do not include the US dollar but consist of two major currencies traded against each other.

Some examples of minor pairs are:

  • EUR/GBP (Euro/British Pound)
  • GBP/JPY (British Pound/Japanese Yen)
  • AUD/NZD (Australian Dollar/New Zealand Dollar)
  • EUR/JPY (Euro/Japanese Yen)
  • GBP/CHF (British Pound/Swiss Franc)

While minor pairs may have slightly wider spreads compared to major pairs, they still offer ample liquidity and trading opportunities.

Exotic Pairs

Exotic currency pairs involve one major currency and one currency from an emerging economy.

These pairs typically have lower liquidity, wider spreads, and higher volatility compared to major and minor pairs.

Examples of exotic pairs include:

  • USD/TRY (US Dollar/Turkish Lira)
  • EUR/TRY (Euro/Turkish Lira)
  • USD/ZAR (US Dollar/South African Rand)
  • EUR/SGD (Euro/Singapore Dollar)
  • GBP/MXN (British Pound/Mexican Peso)

Note that trading exotic pairs requires caution due to their heightened volatility and potential for rapid price movements.

Liquidity in Forex Trading

Beginners often overlook the term liquidity when exploring the currency market.

Yet, understanding and prioritising liquidity can significantly impact trading success.

Simply put, liquidity is how easily and quickly trades can buy or sell an asset without significantly affecting its price.

It defines a currency pair’s ability to be traded without causing significant shifts in its exchange rate.

Liquidity in Forex Trading.
Understanding Liquidity in Forex Trading

Pairs with high liquidity are renowned for their stability and low volatility, thus offering a safer haven for novice traders.

Among the vast array of currency pairs, seven majors stand out for their liquidity.

For instance, the EUR/USD currency pair boasts the lowest market spread and a moderate liquidity range of 0-0.7 points.

It’s a tempting prospect for aspiring traders seeking a reliable avenue for earnings. 

Overall, navigating the forex landscape requires keen attention to trend pairs that align with your expectations.

This means that despite such enticing opportunities, the harsh reality remains that many traders find themselves on the losing end in the long run.

Among all currencies traded, the USD remains a force to be reckoned with when it comes to trading volume.

Factors Influencing Currency Pair Selection

When selecting currency pairs for trading in the forex market, various factors come into play, each exerting its influence on the decision-making process.

Understanding these factors is crucial for traders to make informed choices that align with their trading objectives and risk tolerance.

See below the elements influencing currency pair selection. 

Market Conditions

Market conditions, including volatility, liquidity, and trading volume, significantly impact pair selection.

Highly liquid pairs with tight spreads are preferred by most traders as they offer smoother execution and reduced transaction costs.

Additionally, assessing market volatility helps traders gauge the potential risks associated with a particular currency pair.

Economic Indicators

Economic indicators, such as interest rates, GDP growth, employment data, and inflation rates, are vital in determining currency strength and market sentiment.

Traders often analyse these indicators to anticipate future market movements and select pairs with currencies from countries exhibiting robust economic fundamentals.

Correlation Analysis

Correlation analysis involves examining the relationship between different currency pairs to identify potential opportunities and risks.

A positive correlation implies that two currency pairs move in the same direction, while a negative correlation indicates opposite movements.

Traders may opt for pairs with low correlation to diversify their portfolios and minimise risk exposure.

Trading Strategy

Each trader has a unique trading strategy based on factors like time horizon, risk appetite, and preferred trading style.

Scalpers may focus on highly liquid pairs with narrow spreads for quick, short-term trades, while swing traders may seek pairs with strong trends and ample volatility.

Understanding one’s trading strategy is essential for selecting pairs that align with individual goals and preferences.

Geographic and Political Events

Geo-political events, such as elections, geopolitical tensions, and policy decisions, can significantly impact currency markets.

Traders often monitor geopolitical developments to anticipate market reactions and adjust their pair selection accordingly.

Factors like geopolitical stability and risk perception can also influence currency valuation and market sentiment.

How to Choose a Currency Pair To Trade

Selecting the right currency pair is a pivotal decision that can significantly impact your trading success in the forex market.

Whether you’re a novice trader or an experienced investor, here’s a comprehensive guide to help you choose the perfect currency pair for your trading endeavours.

1. Understand Your Trading Objectives

Before choosing a currency pair, clarify your trading objectives, risk tolerance, and preferred trading style.

Are you aiming for short-term gains or long-term investments? Do you prefer high volatility or stable trends?

Understanding your goals will guide your pair selection process.

2. Assess Market Conditions

Analyse current market conditions, including liquidity, volatility, and trading volume.

Highly liquid pairs with tight spreads are ideal for efficient execution and lower transaction costs.

Consider the time of day and session overlap, as market dynamics vary during different trading sessions.

To ensure you make the best choices in the long run, stay abreast with developing market trends.

Remember, the currency market is constantly changing and dynamic. 

3. Conduct Technical and Fundamental Analysis

Evaluate fundamental factors such as interest rates, economic indicators, and geopolitical events affecting the currencies in your chosen pairs.

Strong economic fundamentals and positive news developments may indicate favourable trading opportunities.

You should also utilise technical analysis tools and chart patterns to identify potential entry and exit points.

Look for trends, support and resistance levels, and key technical indicators to gauge the pair’s price direction and momentum.

4. Consider Correlation and Diversification

Assess the correlation between currency pairs to avoid overexposure to similar market movements.

Diversifying your portfolio with pairs exhibiting low correlation can help mitigate risk and balance your trading strategy.

5. Start with Major Pairs

If you are a beginner, consider starting with major currency pairs like EUR/USD, GBP/USD, or USD/JPY.

These pairs offer high liquidity, low volatility, tight spreads, and ample trading opportunities, making them suitable for novice traders.

6. Factor in Interest Rate Differentials

Interest rate differentials hold considerable sway over currency pair selection.

Traders keen on maximising potential gains often factor in these differentials, particularly when seeking carry trade opportunities.

For instance, choose currency pairs with notable interest rate disparities if you are interested in earning interest income. 

7. Seek Professional Advice

Seeking professional advice can provide invaluable insights and guidance in choosing a suitable currency pair.

Experienced traders or financial advisors can offer valuable perspectives and help refine your trading strategy.

They can provide personalised recommendations based on your trading objectives, risk tolerance, and market analysis.

Therefore, collaborate with a mentor or join a trading community to enhance your learning journey and provide support during challenging times. 

How To Trade Currency Pairs

Now that you are familiar with currency pairs and how to select the best, you probably must be wondering how to trade the currencies.

Keep reading to discover the proper procedures to get started. 

1. Learn Forex Trading

Above everything, learn how the forex market operates.

Familiarise yourself with key concepts such as currency pairs, exchange rates, bid/ask prices, and market order types.

Explore various forex trading strategies, including day trading, swing trading and more, for informed decisions.

You can take advantage of educational resources such as online courses, webinars, e-books, and forums to deepen your knowledge and hone your skills. 

2. Open a Trading Account

The next step is to open a trading account with a reputable forex broker licensed and regulated by the Financial Conduct Authority (FCA).

Research and compare different brokers based on factors such as regulation, trading platform features, customer support, charges, and more.

Then, create a forex trading account using your personal details, including your name, email, phone number, date of birth, and more. Some brokers will also require you to create a username and strong password for an added layer of safety. 

3. Choose a Currency Pair

Once your trading account is set up, it’s time to select the currency pairs you want to trade.

Follow our guidelines above to make the best choices aligning with your trading requirements.

Remember, major currency pairs are popular for their high liquidity and tight spreads.

Minor and exotic pairs may offer greater volatility but also carry higher risks. Overall, conduct thorough research and analysis to identify pairs that align with your trading goals and risk tolerance.

4. Develop a Trading Strategy

A well-defined trading strategy is crucial for success in the forex market.

Determine your trading style, whether day trading, swing trading, position trading, etc and develop a strategy that suits your personality and preferences.

Then, choose clear entry and exit criteria, risk management rules, and profit targets based on your analysis.

As a beginner, ensure you gauge your skill level on a broker’s demo account, after which you can start trading using real money. 

5. Stay Updated On The Forex Market

With your open positions, ensure you track its performance to ensure everything works out as expected.

Stay informed about market developments and news that may impact currency prices. Use economic calendars, news websites, financial publications, and social media platforms to stay abreast of market-moving events.

Continuously monitor your chosen currency pairs and adapt your trading strategy accordingly to capitalise on emerging opportunities and mitigate risks.

Risk Management in Forex Trading

Navigating the forex market entails not just seizing opportunities but also managing risks effectively.

Risk management safeguards against potential losses when trades deviate from your strategy.

In forex trading, risks come in various forms, from market fluctuations to liquidity issues and leverage pitfalls.

Understanding these risks empowers traders to implement the necessary controls.

Effective risk management hinges on employing proven strategies.

Utilising stop-loss and take-profit orders ranks among the most favoured approaches. These tools allow traders to limit losses and lock in profits, serving as essential safeguards.

Moreover, a solid grasp of forex intricacies enables informed decision-making, aiding traders in assessing the viability of their strategies.

For beginners, exercising caution is paramount. Avoid overexposure to potential losses by starting with modest investments.

Begin your currency trading journey cautiously, using funds you are comfortable risking.

Additionally, exercise restraint with leverage trading, as it amplifies both gains and losses. This means you should conduct extensive research and be confident in your trading strategy before venturing into leveraged positions. 

Forex Currency Pairs Correlation

In forex trading, currency pairs correlation refers to the relationship between different pairs and how they move relative to each other.

Understanding this correlation is crucial for traders as it provides insights into market trends, diversification strategies, and risk management.

Currency pairs can exhibit either positive or negative correlations. A positive correlation means pairs move in the same direction, while a negative correlation implies opposite movements.

Forex pair correlation.
Understanding Forex Pairs Correlation

Correlation helps traders formulate effective strategies, including hedging, doubling down on trades, and portfolio diversification.

Correlation between pairs is not static and can change over time due to various factors.

You should regularly monitor correlation patterns to adapt your strategies accordingly.

Final Thoughts

Familiarity with your chosen currency pair is paramount in forex trading.

For beginners, opting for low-volatility pairs offers a smoother learning curve.

Note that while forex trading can yield profits, losses are inevitable.

Therefore, apply risk management controls and avoid emotional decision-making to mitigate massive losses.

Practising with demo trading accounts also helps identify the most suitable pair for your trading style.

Remember, success in forex trading requires patience, discipline, and continuous learning.

By understanding your chosen currency pair, you enhance your ability to make informed decisions and confidently navigate the currency market.

FAQs

How do I choose which currency pair to trade?

To choose which currency pair to trade, focus on analysing market volatility, economic indicators, and geopolitical events that influence currency values. Consider your trading strategy and risk tolerance to select pairs that align with your financial goals and market understanding.

How do I find the best forex pairs to trade?

Identify the best forex pairs to trade by researching pairs with high liquidity, low spreads, and strong market trends. Analyse economic calendars and news to anticipate movements that match your trading strategy and risk profile.

Which forex pair is best for day trading?

For day trading, the EUR/USD pair is often considered the best due to its high liquidity, tight spreads, and the vast amount of economic data available for analysis, which can lead to more predictable short-term movements.

Which forex pair is most profitable?

The most profitable forex pair varies for traders based on their strategy and market conditions, but pairs like EUR/USD, GBP/USD, and USD/JPY are popular for their high liquidity and volatility, offering numerous trading opportunities. Profitability hinges on a trader’s ability to analyse and respond to market dynamics effectively.

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Will Fenton is the founder of Sterling Savvy. He is a personal finance expert and writes about trading, investing, budgeting, and other financial topics.

Along with his education in Economics & Finance, he has experience working in the financial services industry in London working for one of the UK’s leading financial companies, “a trustworthy and respected provider of news, education and market analysis for the everyday investor”.

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