Successful forex trading will require us to pick the right currency pairs to trade at the right time. What are the best currencies to trade? What are the most traded currency pairs, or the most profitable currency pairs to trade? Should we simply look for good opportunities and try to exploit them or should we focus on particular currencies?
If you’re asking these questions, you’ve come to the right place. This blog will take a look at:
- Best forex pairs to trade
- Top five forex currency pairs
- Most traded currency pairs
- Most profitable currency pairs to trade
Setting a stop loss is key to limiting the risk in a trade. See our blog on Where to Set Stop Loss - and Why It's Important>>
What are the best currencies to trade in forex?
Simply put, the best currency pairs are the ones that give us a great chance of successful forex trading.
If technical analysis and trading techniques apply to all forex currency pairs the same, it would seem that there might be no reason to discriminate between the different currency pairs.
However, different currencies and currency pairs do exhibit different behaviors in relation to the larger global markets - so different currency pairs will offer different trading advantages. Furthermore, different markets have properties like liquidity and volatility that will make them more or less desirable in certain situations.
The most successful trading is the result of an effective trading plan. See our 8-Step Trading Plan Checklist here>>
What are the most traded currency pairs?
The most traded currency pairs are major currency pairs - national currencies with huge economies. Overall, there are three main currency pair groups to know about: major currency pairs, cross-currency pairs and exotics.
- Major pairs: The major pairs are highly desirable as currency pairs for trading. The currency pairs are composed of national currencies with massive economies and whose money supply and demand is large enough to maintain a stable and fluid market. The major pairs experience high liquidity and low volatility. The high liquidity means that it’s easy to find a seller for a buyer and a buyer for a seller. This means that the spreads for these pairs will be low, as brokers try to offer rates as competitive as possible.
- Cross-currency pairs: The cross-currency pairs are those pairs that do not have the US. dollar as a component. With the US dollar's role as the world's leading reserve currency, the simple lack of the US dollar in a currency pair reduces the interest in a currency pair dramatically. This leads to increased volatility and lower liquidity.
- Exotic pairs: Exotic pairs are those pairs which are composed of a major currency and a currency from an emerging economy. While the major currency adds liquidity to the market, liquidity is a two-way street. The exotic currency that is part of the pair usually only appeals to those who hold the local currency and a few speculators. It can be difficult to find another trader to exchange with, which leads to matchmaking difficulties on the broker’s end and leads to higher spreads. Exotic pairs can experience huge spreads, particularly during major news events. Higher spreads can negatively affect your bottom line as a trader and the low liquidity can lead to significant slippage between order submission and execution.
Due to the difficulties that come with cross-currency pairs and exotic pairs, it is best to stick with major currencies. This is true even for experienced traders.
The transparency of the major currencies makes them much easier to trade from a fundamental perspective. Although technical opportunities exist for other pairs, the volatility and low liquidity of other pairs make them excessively risky to trade.
Don't make the same mistakes as other traders. Read the 3 Most Common Trading Mistakes - and how to avoid them!
Top Five Forex Currency Pairs
The top five forex currency pairs are not necessarily the most traded currency pairs, but there is quite a bit of overlap. The list below lays out the top five forex currency pairs for trading and some reasons why they are the most profitable currency pairs to trade.
1. EUR/USD – Euro/US dollar
The EUR/USD is the most liquid and most heavily traded currency pair. This is due to the fact that it is composed of the world's top reserve currency and the world's second reverse currency. These currencies also represent the two largest economies in the world.
The European Union and the United States are two of the most transparent economies in the world. They are very open about their economic performance, due to the way their investment markets have developed. This means that most of the cards are already on the table by the time big news hits. This contributes to making the pair easier to understand and trade without a lot of surprises.
2. USD/JPY – US dollar/Japanese Yen
This is the second most heavily traded pair in the forex market. The Japanese Yen has a status as a “safe haven” of sorts among currencies. Investors turn to the Japanese Yen for refuge in times of economic turmoil. This happened during the Great Recession and the pair has been mostly trending toward the Yen since the coronavirus pandemic began.
The Yen has a correlation with economic downturns, similar to that of gold. Consequently, gold is negatively correlated with USD/JPY (since USD is the base currency). This pair tends to be positively correlated with the USD/CHF, as the Swiss franc also has a “safe haven” status with investors.
3. GBP/USD – British pound/US dollar
GBP/USD is another of the top five Forex currency pairs in terms of trading volume. The US and the UK are two very large economies and the interest rate differential between the US Federal Reserve and the Bank of England (BoE) typically drives the price of this pair.
GBP/USD has a negative correlation with USD/CHF since there is a correlation between the CHF and the GBP and they are on opposite sides of these pairs. The British pound is also correlated with the Euro, leading the GBP/USD to have a positive correlation with the EUR/USD.
4. USD/CAD – U.S. dollar/Canadian dollar
The USD/CAD is composed of the currency of the world’s most powerful economy and its neighbor to the north. Traditionally, the Canadian dollar has been much lower in value compared to the US dollar. However, there have been periods of US financial troubles that caused the price of the pair to reach $1. Since the Great Recession and the subsequent interventions by the Federal Reserve, the Canadian dollar has remained below parity.
The Canadian dollar’s value is heavily correlated with commodities. Higher oil prices mean a strong Canadian dollar and for this reason, the Canadian dollar is often labeled a commodity currency like the Australian dollar and NZ dollar.
5. AUD/USD – Australian dollar/US dollar
The Australian dollar is often called a commodity currency. This is because the Australian economy has a huge dependence on commodities, particularly coal, iron ore, copper and gold. China is a significant trading partner for Australia, so when global political tensions between the West and China heat up, the pair often trends downward.
AUD/USD has a negative correlation with the USD/CAD because USD is the quote currency for one and the base currency for the other. The Australian and Canadian economies are also both dependent on commodities, so they correlate with each other. Being on the opposite side of the two pairs may also contribute to the negative correlation.
Things to remember about the best currencies to trade
There are three categories of currency pairs: major pairs, cross-currency pairs and exotic pairs. Major pairs have high liquidity and low volatility. This makes them much safer to trade than cross-currency or exotic pairs. Forex is risky enough and we must do everything we can to mitigate that risk.
EUR/USD is the most liquid currency pair - and it is also the most heavily traded. It is traded at all hours of the day and night without significant liquidity issues. The only exception is during major news events. Other profitable Forex pairs include USD/JPY, GBP/USD, USD/CAD and AUD/USD.