The Best Forex Currency Pairs to Trade
Currency trading, or forex. is the process of exchanging one currency for another or the conversion of one currency into another currency. Unlike stock trading, the forex market is open for the majority of the business week due to differences in time zones; this can make effective trading a more viable option for those who work during the standard exchange hours of 9:30 am to 4 pm.
The forex market is also one of the most liquid in the world, with over $5.3 trillion changing hands every single day. How can you get started forex trading, and which currencies are worth converting? We’ve collected information on six of the most popular and profitable pairs, along with some tips on how to choose a broker and some basic terms you’ll need to know.
- USD to EUR
- USD to JPY
- USD to CAD
- GBP to USD
- USD to CHF
- AUD to USD
First, Understand These Forex Terms
Before you start trading currencies, you’ll need to understand a few basic terms you’ll see over and over again. Some of the most important forex terms you’ll see include:
- Bid: The price at which the market (or your broker) will purchase your currency from you. When you sell currencies, you will receive the bid price.
- Ask: The price at which the market (or your broker) is willing to sell you a currency. When you purchase currencies, you will pay the ask price.
- Spread: The difference between the bid and the ask price. Brokers take the spread as commission in exchange for executing your trade.
- Base currency: The currency you hold before you begin trading. If you are located in the United States, your base currency is probably USD.
- Pip: A single pip is the smallest measurable movement that a currency can make.
- Leverage: A vehicle by which the forex market is opened to individual investors. Most forex transactions require a minimum investment of about $100,000 to see significant trading profits—obviously, this is more money than most individuals can produce to fund a trade. Instead, the broker extends leverage to the trader as a ratio; the most common ratio is 1:100. If your broker extends 1:100 ratio to you, that means that for every $1 you deposit into your account, you can trade with the power of $100.
The Best Forex Pairs to Trade
Now you understand a bit more about forex, you’ll have to figure out what forex pairs you want to trade. This list is based on historical performance and popularity.
1. USD to EUR
One of the most widely-traded currency pairs in the world, USD to EUR, is a shortened way of saying “conversion of United States dollars to euros.” The euro is a stable currency that represents the European Union and is the official currency of 19 of the 28 members of the European Union. Some of the countries that use the euro include Spain, France, Finland, Latvia, and most of the countries in western Europe.
The USD/EUR pair is influenced by political movements that affect either the dollar or the euro in relation to one another. For example, when the European Central Bank intervenes in market activities to strengthen the euro, you can expect the cross of the dollar to the euro to decline.
2. USD to JPY
The Japanese yen (JPY) is the official currency of Japan, and the currency dates back to the Meiji restoration’s attempt to westernize and modernize the Japanese economy. The yen lost a large amount of its value following the conclusion of World War II but has slowly begun to stabilize after reaching a low following the 1973 oil crisis. The yen is now commonly held as a reserve currency behind the USD, the euro, and the GBP.
Yen is considered to be held under a “dirty float” regime thanks to the Japanese government’s policy of active stability intervention. This means that the value of yen sees a number of daily fluctuations, but the central banks of Japan frequently buy and sell the currency en masse to keep exchange rates under control. The Japanese government places a high premium on keeping the value of the yen low to cultivate a competitive export market. If you hold USD, you can potentially create large profits by capitalizing on these daily fluctuations if you’re able to buy in at the right time.
3. USD to CAD
America’s fiscal neighbor to the north and one of their most important trading partners, it should come as no surprise that the values of CAD and the USD are very closely related. The value of the Canadian dollar is also heavily correlated with commodity prices.
In particular, the price of oil has a large amount of influence over the value of the Canadian dollar because Canada’s economy relies very heavily on oil exportation. In 2016, oil prices fell to prices not seen in over a decade, and the Canadian dollar also suffered, slumping to an exchange rate of 1.46 CAD to 1 USD. If you want to exchange USD for CAD, carefully monitor the price of oil to determine the ideal time to buy.
4. GBP to USD
The British pound sterling (GBP) is the official currency of the United Kingdom, used throughout England, Scotland, and Wales. Despite the fact that the United Kingdom was an official part of the European Union until the summer of 2016, the United Kingdom never switched over to the euro like most countries in Western Europe. The GBP is the third most-traded currency, trailing behind the USD and the EUR.
Two major events that have significantly influenced the price of the GBP in the last decade. During the years 2007 through 2008, the price of GBP wildly fluctuated due to the worldwide influence of the Great Recession. In 2007, the GBP reached an all-time high trading at £2.10 per $1 USD—only to crash to a shockingly low £1.40 per $1 USD in 2008, causing many investors to cash out their pounds in exchange for the dollar. Though the pound would recover in the coming years, it would eventually even out to around £1.60 per $1, never again reaching the high of 2007.
The second major influence on the price of GBP was Brexit, the name given to the 2016 vote that would separate Britain from the European Union. Brexit caused the value of the GBP to lose almost 10% overnight and 20% in the months following the vote as investors abandoned the pound for more stable currencies in the wake of negotiations.
5. USD to CHF
The Swiss Franc (CHF) is the official currency of Switzerland. Investors who invest in CHF do so most to protect their assets in times of turbulence. The CHF is largely considered to be a “safe-haven” currency.
This means that in times of volatility, the CHF will usually appreciate when other currencies lose value. On the opposite end of the spectrum, the CHF will often lose value when other currencies are appreciating. During the Great Recession, CHF appreciated against all other currencies except the JPY. CHF and (to a lesser extent) JPY are two of the most popularly traded safe-haven currencies in the world thanks to their low volatility in times of major market movements.
6. AUD to USD
The Australian dollar (AUD) is the official currency of Australia and the sixth most commonly-traded currency pair. The value of the AUD is closely associated with CAD thanks to the interdependent relationship that the economies of Australia and Canada share. AUD is also intrinsically correlated with the commodities market, as Australia remains one of the largest exporters of coal and iron ore in the world.
During the commodity slump of 2015, AUD reached a low point not seen since the 1970s. If you’re interested in holding AUD, you should expect to keep a close eye on the price of these commodities crucial to the Australian economy.