What are Forex Pairs?
Forex is a market, where the currencies are traded. Currencies are traded in pairs, so a Forex pair is a ratio of one currency's value to another. To buy one currency, traders need to sell another. The exchange rate represents the amount of quote currency needed to buy one unit of the base currency. The base currency is as a rule more valuable and placed first, and quote currency is placed second.
What moves currency pairs?
Currencies depend on their national economics and world situation. So currency fluctuations are influenced by several factors.The first one is the interest rate, when the central bank raises the interest rate, the capital return is getting higher, so the country is more attractive to new investments because depositors can potentially earn more. It makes the currency stronger.
The source's prices have a great impact on lots of national economies. For example ores, coal and oil occupy a significant part of the export structures of Canada, Australia, and Saudi Arabia. So when the prices are rising, it means that the currency value is going to rise too. Tracking information about the condition of source prices can help traders do fundamental analysis.Inflation, when the country supplies more currency than the product you can buy for it, it signals about currency surplus. The currency becomes less valuable. For example, imagine if diamonds were available for everyone, it would be less costly, the same thing with the currency.
Economic performance. The releases of measurements of national economics metrics can strongly influence the exchange rate. The currency is based on the national economy, the stronger economy, the stronger currency.
How currency pairs work
As it was said, traders need to sell one currency to buy another one. The currency pair looks like the ratio of one currency to another, like EUR/USD, GBP/USD, CAD/JPY, and others. If the exchange rate of the USD/JPY pair is equal to 143,42, it signifies that to buy 1 United States dollar, you need to sell 143,42 Japanese Yen. Traders make money from currency value fluctuations. They buy it when it starts to rise and sell it when it starts to fall, so they gain a difference.
Correlation in Forex currency pairs
There is a relation between currency pairs, we can say that historically some currency pairs move in one direction and some in the opposite. For instance, some countries’ economies depend on the same factors or are tied closely. The currency pairs of USD/JPY and CHF/USD are positively correlated, Japanese yen and Swiss franc are traditionally used as haven currencies because they are more stable in world crises. The currency pairs of GBP/USD and EUR/USD have a positive correlation because the British and European Union economies are closely related. Correlation can help traders to predict currency pairs further and diversify risks.
What Makes a Good Currency Pair?
Liquidity
The general concept of liquidity refers to the speed at which a particular asset can be turned into cash. For example, money on the card has more liquidity than real estate.Simply put, liquidity in the Forex is the ability to easily buy and sell a currency pair. Liquidity can vary depending on several factors, like time of trading (the pairs with JPY have higher liquidity while Asian Forex market working hours and lower in European). Major Forex pairs usually are more liquid because they are just more popular to trade. Because the low liquidity means that the number of buyers is lower than sellers. The importance of choosing high liquid currency pairs is an opportunity to close deals without difficulties and not hold an unprofitable position.
Volatility
Volatility is a range of price changes during a certain period. The advantage of trading volatile currency pairs is more potential gain. As traders get profit from price fluctuations. Traders can use lower leverage but have quite a fast profit from the deal.The disadvantage is the importance of having the experience to trade more volatile pairs in order not to lose money. Since the strategy for trading volatile pairs, it is necessary to check the strategy. Also, trading volatility supposedly has a bigger spread, but it can be compensated by faster and bigger profit.
Predictability
Predictable currency pairs signify the opportunity of making accurate assumptions about currency pair price movement. It depends on the measure of economic transparency, the availability of information about economic, political, and social situations, and the currency movement in the past.
Major Currency Pairs
What are the major currency pairs?
The currency pairs that include the United States dollar are called major. Usually, major currency pairs are the most attractive for traders, because of their higher liquidity. The most traded currency in the world is the U. S. dollar and the most traded currency pair is EUR/USD.
What affects the rates of major currency pairs?
Currency rates of major pairs are affected by interest rates set up by central banks, the rising interest rates make countries more attractive for investment and strengthen the currency. Also, rates are influenced by economical and political data. Political releases that announce impressive changes affect the rate. The information about elections or international treaties can change the rate in a minute.
What are the benefits of trading major currency pairs?
As was mentioned major currency pairs are more traded, so have higher liquidity. Also, these pairs are considered to be more predictable, because there is more reliable information about major currency pairs so it is easier to do accurate forecasts. But also the abundance of information can lead to difficulties in the analysis since it will take a very long time. Trading major pairs are supposed to have much lower spreads. According to their liquidity, major pairs are less volatile, they are not characterized by sharp falls and ups. So, major pairs are a good way to start on Forex, because of the above-listed factors.
Forex Trading Sessions
Forex is a round-the-clock market, there are three main sessions, North American (New York), European (London), and Asian (Tokyo). Also one of the quite popular sessions is the Australian (Sydney).
Asian Forex Session (Tokyo)
The working hours for the Asian session are from 11 p.m. to 8 a.m. GMT, currencies such as the Japanese yen and South Korean won show higher volatility because there is the most news about their economies during the Asian session.
European Forex Session (London)
The working hours of the London session are 7 a.m. to 4 p.m. GMT. The most volatile pairs during the London session are those which include Great Britain pound, Swiss franc, and euro.
North American Forex Session (New York)
The open hours of the New York session are from noon to 8 p.m. The most volatile pairs during that session, pairs include the Mexican peso, Canadian, and United States dollar.
Australian Forex Session (Sydney)
Australian session open hours are from 9:00 p.m. to 7:00 a.m. GMT. The most volatile pairs include Australian and New Zealand dollars.
Trading Session Overlaps
Trading session overlap is a situation when a few sessions are working at the same time. For example, London and New York sessions are working together from noon to 4 p.m. GMT. This time is considered to be the most volatile with the biggest volume of trading, so it offers great opportunities.
Best Forex Pairs To Trade During each session
Best Forex Pair To Trade During the Asian session
The most traded pairs during the Asian session are those which include the Australian dollar and the Japanese yen. They have lower spreads and higher liquidity at the time of that session.
Best Forex Pair To Trade During the European session
Of course, during the European session, the most liquid and traded pairs with the lowest spreads are pairs with the euro and Great Britain pound. For example, GBP/EUR, GBP/USD, EUR/USD, etc.
Best Forex Pair To Trade During North American session
It is better to choose pairs that include the United States dollar, European currencies, and the Japanese yen. Like, such as USD/JPY, EUR/JPY, USD/CHF, EUR/USD, and GBP/USD.
Best Forex Pair To Trade During Australian session
The pairs with the highest liquidity during the Australian session are USD/NZD, USD/AUD, and USD/JPY.
Worst Times to Trade Forex pairs
The worst time to trade is considered to be when only New Zealand and Australia sessions are working, because of low liquidity and high spreads.
Best Times to Trade Forex pairs
The best trading time is supposed to be during the overlap of European and North American sessions. There is the biggest trading volume and the lowest spreads on the most popular pairs.
Top 10 most traded currency pairs
The list of the most traded currency pairs include:
- EUR/USD - the most traded in the world;
- GBP/USD;
- GBP/EUR;
- USD/JPY;
- CHF/USD;
- USD/NZD;
- USD/CAD;
- USD/AUD;
- EUR/CHF;
- AUD/NZD.
Impact of News Releases on Forex Markets
Releases of economic performance or political events have a great impact on the exchange rate, it can signify future changes in economic decisions, like changes in interest rate, economic policy in general, or market expectations.
How to trade forex successfully starting with one pair
It is always recommended to start with a pair of the national economies you are most familiar with. This will help you make more accurate predictions about her movements. Also, beginners can simply learn to trade on one pair and not spread their attention on several at the same time.
The Importance of a Reliable Trading Platform
It is important to choose a platform with a good reputation because the platform offers you ways to fund and withdraw money from your account. It is important that these are safe and convenient ways.Also, the interface should be convenient so that you do not face difficulties during trading.The platform should offer educational materials and analytics. Therefore, the success of the trailer largely depends on the chosen platform.
Tips for trading currency pairs
For the first time, it is better to choose one or a few currency pairs to understand the mechanism of the market. Don’t use too high leverage, if your strategy isn’t time-tested. Be rational, don’t quit trading after the first unsuccessful deal, your mistakes are your experience, which can help you in the future.
Conclusion
Choosing the right time and pairs for trading can help you to raise your income and reduce costs, read and learn more about economics of chosen pairs, it can help to conduct a fundamental analisis and gain more money.
Start trading
by JustMarkets, 2022.09.23
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