Two common questions that I get from aspiring forex traders are: “which
currency pairs are best to trade?” and “what are the best times to trade?”
This two-part article will first address the question “which currency
pairs are best to trade?”, and next week we will address the question
“what are the best times to trade?” You should use this two-part article
series as a reference guide to answer any question you may have about
which currency pairs to trade and what times to trade them. Enjoy.
Types of Currency Pairs:
There are three categories of currency pairs; majors, crosses, and
exotics. The following points will explain which currency pair’s fall into
these three categories and the advantages or disadvantages of each.
• Majors
The “major” forex currency pairs are the major countries that are paired
with the U.S. dollar (the nicknames of the majors are in parenthesis). We
are also including silver and gold in this list since they are quoted in
U.S. dollars and we trade them regularly.
EUR/USD – Euro vs. the U.S. dollar (Fiber)
GBP/USD – British pound vs. the U.S. dollar (Sterling, Cable)
AUD/USD – Australia dollar vs. the U.S. dollar (Aussie)
NZD/USD – New Zealand dollar vs. the U.S. dollar (kiwi)
USD/JPY – U.S. dollar vs. the Japanese yen (the Yen)
USD/CHF – U.S. dollar vs. the Swiss franc (Swissie)
USD/CAD – U.S. dollar vs. the Canadian dollar (Loonie)
XAU/USD – Gold
XAG/USD – Silver
Now, there are some things we need to discuss about the
“majors” before we move on to discuss the “crosses”.
First off, many of the major currency pairs are correlated in their price
movement, meaning they move almost identical to one another. For example,
the EURUSD and the GBPUSD tend to move in the same general direction (not
exactly the same), the GPBUSD is typically a bit more volatile than the
EURUSD, but if the EURUSD is in an obvious up or down trend you can safely
assume the GBPUSD is in the same trend, thus we say they are positively
correlated.
The USDCHF is negatively correlated to the EURUSD, so if the EURUSD is
moving higher the USDCHF is most likely moving lower. You will find if you
take a EURUSD chart and a USDCHF chart of the same time frame and hold one
right side up and one upside down, they will look fairly similar, this is
because they are negatively correlated.
So what does this correlation business mean to you? It means you need to
be careful when making your trading decisions so as to not double up your
risk or trade against a position you currently have open. For example, if
you enter a long on the EURUSD and the GBPUSD, you are basically doubling
your risk, and there is really no point in trading both at the same time,
you might as well trade one or the other, if there is a similar price
action setup on both, pick the pair that the setup looks more defined on.
Similarly, if you enter a long position on the EURUSD and a short on the
USDCHF, you are essentially doubling your risk. I have found the USDCHF to
be very choppy compared to the EURUSD and GBPUSD, and I rarely trade the
USDCHF as a result, I aim my focus on the EURUSD and GBPUSD if I want to
trade a European currency against the U.S. dollar. This is not to say you
should never trade the USDCHF, but just be advised that in my experience
the EURUSD and GBPUSD provide better price action trading opportunities.
The EURUSD is also the most widely traded pair, and therefore it carries
the highest volume of all currency pairs, this also means it is the most
liquid, which is another reason I prefer it over its correlated
counter-parts. The EURUSD makes up about 27% of forex trading volume, next
is the USDJPY at 13%, followed by the GBPUSD at 12% of the total forex
trading volume.
• Commodity currencies
A commodity currency is a name given to currencies of countries which
depend heavily on the export of certain raw materials for income. The
major currencies that are also considered “commodity currencies” are the
Australian dollar, Canadian dollar, and New Zealand dollar.
Gold and silver are actual commodities, so they can also be considered
“commodity currencies”, and once again they are traded in U.S. dollars, as
we noted above.
My experience trading the commodity currencies is that the AUDUSD, NZDUSD,
gold and silver, are the best to trade, I tend to avoid the USDCAD as I
find it fires off many “false” trading signals, this may have something to
do with it being heavily influenced by the price of crude oil. Whatever
the reason, I typically avoid trading the USCAD and advise my students do
the same, perhaps at a point in the future the USDCAD will “behave” more
logically, but at the current time I tend to avoid it like the plague.
• Crosses
The “crosses” are those pairs that are not paired vs. the U.S. dollar such
as:
AUD/CAD – Australian dollar vs. the Canadian dollar
AUD/CHF – Australian dollar vs. the Swiss franc
AUD/JPY – Australian dollar vs. the Japanese yen
AUD/NZD – Aussie dollar vs. the New Zealand dollar
CAD/JPY – Canadian dollar vs. the Japanese yen
CHF/JPY – Swiss franc vs. the Japanese yen
EUR/AUD – Euro vs. the Australian dollar
EUR/CAD – Euro vs. the Canadian dollar
EUR/CHF – Euro vs. the Swiss franc
EUR/GBP – Euro vs. the British pound
EUR/JPY – Euro vs. the Japanese yen
EUR/NZD – Euro vs. the New Zealand dollar
GBP/AUD – British pound vs. the Australian dollar
GBP/CHF – British pound vs. the Swiss franc
GBP/JPY – British pound vs. the Japanese yen
NZD/JPY – New Zealand dollar vs. the Japanese yen
Now, I am not advising traders trade all of these crosses, there is
certainly a short-list of the crosses that I trade and that I recommend
all my students trade. That short-list looks like this: AUD/JPY, EUR/JPY,
GBP/JPY, and NZD/JPY.
These four cross pairs are the most widely followed and make a nice
addition to the major pairs mentioned above. Keep reading and I will
condense all of this down at the end and show you how to make a concise
“watch list” of currency pairs that you can follow on your forex trading
journey.
• Exotics
The “exotics” are those pairs that consist of developing and emerging
economies rather than developed and already industrialized economies like
the majors. Here is a list of some of the more commonly traded exotics:
USD/TRY – U.S. dollar vs. the Turkish lira
EUR/TRY – Euro vs. the Turkish lira
USD/ZAR – U.S. dollar vs. the South African rand
USD/MXN – U.S. dollar vs. the Mexican peso
USD/SGD – U.S. dollar vs. the Singapore dollar
The exotic currency pairs are not the best place to start as an aspiring
forex trader, I still do not trade them and there are reasons why. The
exotics are much less liquid than the majors and even the crosses. This
means there is more risk built into the exotics, this makes them more
prone to “slippage” and it also means they have wider spreads than the
majors and the crosses.
(Note for total newbie’s; the “spread” is the price you pay your broker
for “making the market” for you, it is the difference between the bid and
the ask price, you automatically pay this every time you enter a trade, it
can be very low on the majors, sometimes only 1 pip, the exotics can have
very high spreads that are usually well over 10 pips. Essentially, the
spread means you are negative on a trade from the beginning, so you must
overcome the spread to get into profit, no sense in purposely putting
yourself in the hole 15 or 20 pips by trading the exotics when you can
trade the majors and only be 1 or 3 pips negative. Put the odds in your
favor)
The exotics can also be much more volatile and thus less reliable than the
majors and crosses, due to the thin liquidity in the exotic pairs they can
move quite quickly and “jump around” or “slip” much more often than the
majors or crosses. There simply is no real reason to worry about or trade
the exotics, the majors and crosses provide you with more than enough
price action trading opportunities to have a successful trading career.
Traders who attempt to trade the exotics often get caught up in
analysis-paralysis and are likely guilty of over-trading, they are
certainly more susceptible to over-trading. Bottom line; ignore the
exotics.
Forward this letter to any forex trader you know. Aspire
to Inspire, Before You Expire!