Do you know which Forex currency pairs are most traded in the Forex market? And how can you choose the right Forex pair for your trading strategy? These are common questions that many traders have when joining this market. If you also have these questions, read this article right away!
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What are Forex currency pairs?
A Forex currency pair is a combination of two different currencies used to measure the value of one currency unit against another currency unit. Each currency pair is represented by a unique symbol.
A currency pair typically consists of a base currency and a quote currency (counter currency). In a currency pair, the currency unit listed first is called the base currency, while the currency listed second is called the quote currency. The value of the currency pair is expressed through the exchange rate, which indicates how many units of the base currency are needed to obtain one unit of the quote currency.
A common example of a currency pair is EUR/USD, where EUR is the base currency and USD is the quote currency. The exchange rate of this currency pair indicates how many EUR are needed to obtain one USD.
Major Forex currency pairs
The major Forex currency pairs are the most popular and most traded currency pairs in the Forex market. Here is an overview of four of the most traded currency pairs, based on the triennial survey in 2022 by the Bank for International Settlements (BIS).
The most traded currency pair is EUR/USD. This pair is formed by comparing the value of the euro of the European region to the US dollar. This could be due to the global prominence of the economies in the European and US markets. It accounts for 22.7% of the overall market share, according to the latest BIS survey. The high daily trading volume and liquidity of this pair ensure low spreads for traders.
The next prominent Forex pair is USD/JPY. The value of this pair is quoted in Japanese yen per US dollar. Japan is a major national economy and also a large exporter in the world. This makes USD/JPY one of the highly liquid and widely traded currency pairs globally.
It tends to have a positive correlation with the USD/CHF and USD/CAD currency pairs. This relationship is due to the US dollar being the base currency in all three pairs. USD/JPY also reacts to changes in interest rates by the Bank of Japan and the impact of the yen against the US dollar.
Trading the GBP/USD currency pair is formed by comparing the value of the British pound to the US dollar. This pair accounts for 9.5% of the foreign exchange market share, slightly down from the previous survey in 2019. Once again, the popularity and trading volume of this pair reflect the strength of the UK and US economies.
GBP/USD has an inverse correlation with USD/CHF and a positive correlation with EUR/USD. This is due to the positive correlation between the British pound, Swiss franc, and the euro.
The USD/CNY currency pair represents the relationship between the US dollar and the Chinese yuan. Its market share has increased to 6.6% from the previous 4.1% in daily forex trading.
The trade relationship between the US and China is an unstable one, providing ample speculative trading opportunities for USD/CNY traders. Those interested in USD/CNY should stay aware of developments in this relationship as they can impact the pricing of the USD/CNY pair.
Why are these Forex currency pairs traded the most?
The popular Forex currency pairs listed above include EUR/USD, USD/JPY, GBP/USD, and USD/CNY. These pairs are not chosen randomly; they have reasons behind their popularity.
Firstly, USD is the most widely used currency in the world and serves as the reference currency for international transactions. Therefore, when trading pairs involving USD, market participants can easily access information about the US economy and global events that affect USD.
Secondly, these currency pairs have high liquidity in the Forex market. High liquidity means there are many participants trading these pairs, ensuring that trades can be executed quickly and at reasonable prices. This makes these currency pairs a popular choice for investors and traders.
Lastly, these Forex currency pairs are favored for their stability. The economies associated with these currencies are relatively stable and developed.
Choosing the right Forex currency pair for your trading strategy
When participating in Forex trading, selecting the appropriate currency pairs is one of the most important decisions you need to make. Choosing the wrong pair can lead to risks and even financial loss.
To help you choose suitable Forex currency pairs, consider the following approaches:
1. Learn about currency pairs: Before starting trading, you should research different Forex currency pairs and understand the differences between them. The most popular currency pairs in the Forex market include EUR/USD, GBP/USD, USD/JPY, and USD/CHF. Each currency pair has its own characteristics and may reflect various factors such as economic conditions, politics, and market volatility.
2. Define your trading goals: Your trading goals are also an essential factor when selecting Forex currency pairs. If you want to make quick profits, you can choose currency pairs with large price swings, such as GBP/JPY or EUR/JPY. However, if you aim for long-term and stable investments, currency pairs like EUR/USD or USD/JPY can be good choices.
3. Assess risks: When selecting Forex currency pairs, you also need to evaluate potential risks. If you choose currency pairs with large price swings, the risks will be higher compared to more stable pairs. You should also consider other factors such as exchange rates, economic conditions, and political situations of the countries related to those currency pairs.
4. Test before live trading: Before starting real trading, it's advisable to test different Forex currency pairs on a demo account. This will help you understand their characteristics and determine the most suitable currency pair for your trading method.
What factors affect the rates of major currency pairs?
The most fundamental factors that influence currency pairs are changes in overnight interest rates by central banks, economic data, and politics.
Interest rates: The maintenance of monetary and financial stability is a requirement of central banks. They do this by affecting interest rates. When a central bank raises its overnight interest rate, it increases demand for that currency because investors and traders want higher yields, which leads the currency to gain relative to other currencies.
Economic Data: Economic releases are reports that give traders a look at how a country's economy performs. The CPI (inflation) statistics, Nonfarm payrolls (employment data), gross domestic product (GDP), retail sales, purchasing managers index (PMI), and others are significant economic indicators that affect exchange rates.
Politics: Trade wars, elections, corruption scandals, and policy changes cause instability that is reflected in the FX market. Government intervention in the economy has a chance to increase or decrease the relative worth of a currency.
Volatility: Traders typically take smaller positions on currencies that are more volatile and larger positions on currencies that are less volatile. Any of these pairs can experience volatility at any time as a result of sudden changes in interest rates, major changes in the outlook for the economy, or unstable political conditions. For the most recent news and analysis, it is crucial to follow these markets' specific pages.
Before entering the Forex market, it's crucial to understand the nature and characteristics of currency pairs. Each currency represents the different economic situations of countries, which create Forex currency pairs with correlations or opposing movements. You can rely on this information to make more informed trading decisions.
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