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Foreign exchange or forex – as its name suggests – is the exchange of one foreign currency for another. Forex trading is distinct from other forms of trading because it always involves trading in currency pairs, since you always need to buy or sell one currency with another.
A currency pair includes a base currency and a quote currency, with the base currency on the left and the quote to its right. The forex price is an indicator of how much of the quoted currency you will need to pay for a unit of the base currency.
As an example, the base currency in the EUR/GBP pair is the Euro, and the quote currency is the British pound. If the current forex price is 0.86 EUR/GBP, you would need to pay 0.86 pounds to purchase 1 Euro.
Major and minor currency pairs
There is a clear distinction between various currencies. Some currencies are more highly traded globally and include the U.S. dollar, Euro, Japanese yen, British pound, and Swiss franc, among others.
The major currency pairs in turn, are made up of the five currencies above. These pairs are namely, the EUR/USD, USD/JPY, GBP/USD, USD/CHF. Other pairs that could be included are the commodity currency pairs such as the USD/CAD, AUD/USD, and NZD/USD.
Minor currency pairs which are traded less than the majors include EUR/GBP, EUR/AUD, GBP/JPY, CHF/JPY, NZD/JPY and the GBP/CAD. These are also known as cross currency pairs since they do not include the USD.
Exotic currency pairs comprise of 1 major currency and an exotic currency, and popular exotic pairs include EUR/TRY (Euro/Turkish Lira), GBP/ZAR (British Pound /South African Rand), AUD/MXN (Australian Dollar/Mexican Peso), USD/THB (US Dollar /Thailand Baht), and JPY/NOK (Japanese Yen/Norwegian Krone).
Most popular currency pairs
You can trade any currency pair you choose, but there are some pairs that are more popular than others. Here’s why.
Typically, FX investors prefer to trade major pairs that are already heavily traded, since it results in narrower spreads and in turn, lower trading costs. Higher volumes also result in greater liquidity, allowing investors the opportunity to enter and exit the market easily.
Greater liquidity can also result in relatively lower volatility, so buying and selling large positions will not cause large fluctuations in prices.
Here are the most popular currency pairs you should look at when trading FX.
1. EUR/USD
The EUR/USD currency pair is hands-down, the most highly traded pair in the world. This pair represents more than a fifth of all FX transactions, and understandably so.
The US dollar is both the currency of the largest economy in the world and the largest reserve currency globally, and the Euro is the official currency for 19 of the 28 members of the European Union, including France and Spain.
This pair is often impacted by political events in either economy, as well as monetary policy changes affected by the Federal Reserve in the US or the European Central Bank.
Trade the EUR/USD pair with spreads as low as 0.6 pips with MT5 here.
2. USD/JPY
The second most traded currency pair is the USD/JPY pair. This pair is often influenced by the events happening in Asia, and is also popular during periods of uncertainty due to the Yen’s reputation as a safe haven currency.
Trade the USD/JPY pair with spreads as low as 0.8 pips. Find out more here.
3. GBP/USD
The GBP/USD pair is the third most heavily traded currency, with both currencies belonging to some of the oldest modern economies in the world. They are also democratic open economies where information is forthcoming and relatively transparent.
The GBP has seen greater interest in recent years following its referendum to leave the European Union bloc, or Brexit. This prompted unprecedented political uncertainties for the country – including the change of two prime ministers and numerous attempts to negotiate a suitable agreement with the EU bloc – and heightened volatility for the Sterling.
There is also a strong correlation between the GBP/USD and the EUR/USD, making them easier to hedge and trade through technical analysis.
Trade the GBP/USD with spreads as low as 0.7 pips with MT5 here.
4. AUD/USD
The AUD/USD pair is the first commodity pair in this list. The AUD is the official currency of Australia, a resource rich, commodity dependent economy.
The value of the AUD is impacted largely by the production of commodities like coal, iron ore and copper, as well as the fluctuations in the economic situation in China, Australia’s largest trading partner.
Trade the AUD/USD with spreads as low as 0.8 pips. Learn more here.
5. USD/CAD
The USD/CAD pair is yet another commodity pair. The Canadian dollar is the official currency of Canada, one of the United States’ closest neighbours and most important trading partners.
The Canadian economy is a resource based one, with a heavy reliance on oil exports. To that end, the CAD is largely influenced by the price of oil, and has a strong correlation with commodity prices.
The USD/CAD pair also behaves in a similar fashion to the AUD/USD.
Start trading the USD/CAD pair with spreads as low as 2 pips. Learn more here.
6. USD/CHF
The USD/CHF pair shares a strong correlation with the USD/JPY pair, given the Swiss Franc’s reputation as a safe haven currency. Both the CHF and JPY currencies tend to appreciate in value during economic recessions and times of greater volatility.
Trade the USD/CHF with spreads as low as 1.8 pips.
Special mention: USD/SGD
While the USD/SGD pair is not a major pair, unlike the rest of the pairs mentioned earlier, it remains an interesting currency pair for investors based in the Southeast Asian region.
It is a currency that is well understood within the region, and its strength is often an indicator of the health of the Singapore economy as well as that of the global financial economy. It can also be very useful as a hedge for investors with a predominantly Singapore-dollar denominated portfolio.
Trade the USD/SGD pair today with spreads as low as 0.8 pips.
Best way to trade FX
You can start trading FX by selecting one FX pair that you wish to trade, and read about the best time to trade FX here. You should then take time to analyse the market, read up on data that influences that currency pair, and choose a suitable position to enter based on technical analysis.
You can do all of this easily with the appropriate trading platform, such as the powerful multi-asset platform, MetaTrader 5 (MT5).
