The concept of currency pairs
At the beginning of the discussion of choosing the best currency pairs for Forex trading , we will define the concept of currency pair (Currency Pair) and the difference in the nature of trading on these currencies and stocks.
What is a currency pair?
In the Forex financial market to exchange currencies, the value of one currency is always measured against another currency, hence the concept of currency pairs. In this market, you always see the value of the US dollar against another currency and it does not make sense alone. For example, the US dollar is worth 108.23 against the Japanese yen, meaning that each US dollar is worth 108.23 times the Japanese yen (in other words, you have to pay 108.23 Japanese yen to buy each US dollar).
Currency and stock differences
According to the introduction of the previous part, the concept of two-way market can be explained. Because we are dealing with a pair of currencies, as a result of increasing the value of one side of this currency, the value of the other side decreases. As in the previous example, if the US dollar strengthens, the Japanese yen will weaken, and vice versa. As a result, we do not always have to benefit from the value of one side, but we can also benefit from the value of the other side. In this type of market, unlike the stock market and stock exchange, which only benefits by increasing the value of a company’s stock and there is only one buying option, in this market there are two buying and selling options: buying to buy the first party and selling to buy the other party. The second is the sale of the first party. As a result, whether the price chart goes up or down, you can make a profit by predicting the direction of movement, while in stocks you only make a profit by going up the price chart.
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Types of currencies
In this section, we will examine the types of currency pairs and introduce them so that the concept is complete and we can choose the best currencies for the transaction in the last section.
The main currency pairs (Major Currency)
The following 4 currency pairs are called major currency pairs and the largest volume of transactions in the Forex financial market is done on these currencies.
- EUR / USD (equivalent to the value of the euro against the dollar)
- GBP / USD (equal to the value of the pound against the dollar)
- USD / CHF (equivalent to the value of the dollar against the Swiss franc)
- USD / JPY (equivalent to the value of the dollar against the Japanese yen)
In the above list, the euro has the highest volume of transactions in dollars and is the main currency in this market. As you can see, the US dollar has the highest trading volume among other currencies.
Cross Rate Pairs
Currencies that do not have the US dollar on either side are called crossover or sub-currency pairs. Due to the high volume of transactions on the dollar and as mentioned in the previous section, as a result of the lack of dollars on both sides, it becomes a secondary currency and naturally fewer transactions are made on these items.
The rate of movement and price change in currencies
There are two important points to choose the best currency pair for trading in the Forex market. The first is that it is one of the main currencies because it has a higher trading volume, and the second is that the amount of movement and daily price change is very important. If the currency has few trades and its price chart does not go up or down too high, then it will not be very profitable for you. The more changes in the daily price of a currency, the more profitable trading opportunities there are for you. Identifying the right currency pairs is one of the topics in the Forex alphabet course.
You can use different tools to see the most price changes in currencies. Some of these tools are added to your trading software and some are available online. For simplicity and start on this concept, you can use the reputable OANDA site to see the amount of changes in percentage and in pip.
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