The Foreign Exchange Market, best known as forex, is always fluctuating making it a very fascinating asset class. From Monday to Friday, the forex market ticks 24 hours fueling the world of international commerce and trade to the tune of $6.6 Trillion a day
🧑💻 To a beginner, the number of currency pairs available to trade might be a bit overwhelming. So which pairs are the best to trade? The answer varies greatly depending on your risk profile and trade rationale. Instead, we can discuss the top traded currency pairs to help you understand a good starting point.
➡️ Before we go any further, let’s define a currency pair: a comparison of one currency’s value against another. The first currency in the pair is named “the base currency” and the second is “the quote currency”. The comparison indicates how much of the quoted currency is needed to buy one unit of the base currency. Therefore, any time you are trading the forex markets you are simultaneously trading two currencies at the same time!
When it comes to trading currency pairs, you may think of a pair as a single unit. When you “buy” the pair you believe the value will go up or if you “sell” you believe the value will go down. When buying the currency pair, you are purchasing the base currency while at the same time selling the quoted one. The inverse is true if you are selling the currency pair, which means you are selling the base currency while simultaneously buying the quoted one.
Currency pairs are mostly denominated against the US Dollar, but in some cases, a pair can exclude the US Dollar - oftentimes referred to as “crosses”, for instance, EUR/GBP.
According to the 2019 Survey of Foreign Exchange Turnover provided by the Bank For International Settlements, the US Dollar is involved in 88% of all foreign exchange transactions around the world. This is partly the reason why the US Dollar is known as the world’s “reserve currency”. Therefore it should come as no surprise that the top 3 most traded currency pairs all include the US Dollar, as follows:
With a 24% share of all daily Forex transactions, this is the most popular currency pair. Because of the stable economic growth and strong trade relations between the two regions (USA and Europe), this currency pair is relatively stable when comparing the US Dollar to other currencies such as the Turkish Lira or Mexican Peso, which also translates to tight spreads. However, that is not to say the EUR/USD has been super stable, with some significant ups and downs throughout the Greek Debt Crisis and recently with aggressive monetary policies implemented by the central banks of both currencies.
With a 13.2% share of all daily Forex transactions, this is the second most popular currency pair. Because of the stable economic growth and strong trade relations between the two regions (USA and Japan), this currency pair is also relatively stable. However, one common theme historically has been the Bank of Japan’s super aggressive policies in efforts to keep the Japanese Yen weak. The reason? Given Japan is a major exporter of goods, a weaker Yen makes Japanese exports more favorable when compared to the rest of the world. In this case, the US Dollar is the base currency which is the opposite of EUR/USD where it is the term currency.
Accounting for 9.6% of all daily transactions, this pair - also commonly referred to as “cable” among professionals - is quite popular because of the political stability of the United Kingdom. However, as we have seen shortly after the surprise Brexit referendum and most recently with the dire coronavirus situation, this currency pair has been subject to a bit more volatility recently. The Bank of England, which manages the British Pound, is often touted as one of the most effective central banks, which adds to the credibility of the currency’s value.
All in all, forex is an exciting marketplace because it is the lifeblood of global commerce by enabling Sony in Japan to sell its television sets in the USA, BMW in Germany to sell its cars in Mexico, and so on.
We would urge you, before you start trading forex, to explore the features of the NAGA Trader, learn from your fellow traders sharing their wisdom on the NAGA Feed, or by digesting beginner content on the NAGA Academy.
🎯 Happy forexploring!
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