Want to participate in the largest market on earth? Get your feet wet in the Forex markets.
Forex, or foreign exchange, is the global, decentralized market for trading currency pairs. With participants including central banks and mega-financial institutions, the amount of value traded in Forex in a single day numbers in the trillions.
There are many currency pairs that can be traded.
If you’re just getting started, here are six of the most popular currency pairs you should consider:
- EUR/USD: The Euro/US dollar pair is heavily traded and very liquid.
- USD/JPY: The US dollar/Yen pair is also widely traded and very popular among investors and traders. Because the of yen’s perceived stability, it may rise during times of market turmoil and decline during times of risk appetite.
- GBP/USD: Referred to as the “cable,” this pair is also a favorite among Forex traders. The pair may exhibit a positive correlation to the Euro/US dollar pair.
- USD/CAD: The US dollar/ Canadian dollar pair may exhibit good movement and may be driven by changes in crude oil prices and other natural resources.
- USD/CHF: The US dollar/Swiss Franc pair is another highly popular pair and like the Japanese Yen, may be driven by market unrest and risk aversion.
- AUD/USD: The Aussie dollar/ US dollar pair is another widely traded currency pair that may also be driven by commodity prices and an increase in risk appetite.
Of course, there are many other pairs that may be traded as well. Some of these include the GBP/JPY, EUR/CHF, EUR/CAD and AUD/NZD.
What may make some pairs better for trading than others? Here are a few considerations:
- Liquidity: When trading forex, it is important to trade in markets with high volumes and good liquidity.
- Correlations: If you are bullish the dollar, it could potentially make sense to buy dollars and sell closely correlated currencies such as the Australian and New Zealand dollars.
- Risk appetite or aversion: If you believe risk appetite will increase, you could look to sell perceived safe haven currencies such as the Yen or Swiss franc.
- Spreads: More heavily traded currency pairs such as the EUR/USD may have tighter pip spreads than other traded pairs such as USD/SGD. Wider spreads can potentially make profitable trading even more difficult to achieve and can increase slippage.
- Interest rate differentials and monetary policy: Differences in and changes in interest rates can have a significant impact on forex markets. Higher interest rates can lead to higher currency values while lower interest rates can weigh on currency values.
Today’s Forex markets offer a wealth of opportunity for traders and investors. Like other markets, the Forex markets carry significant risks that should not be taken lightly. If you are interested in trading Forex, sticking with the top pairs-at least at the beginning- may be wise. In addition to trading the most popular pairs, you can also trade Forex in extremely small amounts to try to keep your risk to a minimum.