What are the Best Currency Pairs to Trade?
That’s a question that every trader will have asked themselves many times and they will likely do so again throughout their trading journey. The reason for that is that as with so many things in the financial markets there is no definitive answer to this question, or at least, not perpetual one.
After all, markets are dynamic, that is ever-changing and so is the list of the best instruments to trade, what works for traders today may not be appropriate in three or six months.
That said, there are some ground rules we can look at that will take us some way towards answering the question above.
The best currency pairs for most traders to trade are those with good round the clock liquidity that are liable to trend. That is the price following a particular direction for a fixed period of time.
The more illiquid currencies whose prices move erratically are less desirable, though some active short-term specialist traders known as scalpers can prefer this type of instrument.
For most of us though liquidity is the determining factor. The most liquid of all FX pairs is the Euro versus the US dollar (EURUSD). The British pound against the US Dollar (GBPUSD)
The US Dollar versus the Japanese Yen (USDJPY) and the Australian Dollar versus its US counterpart (AUDUSD) are all very popular and widely traded FX pairs.
The top ten FX pairs by volume traded and news flow
Source Good Money Guide Research
Which are the best brokers to trade Forex pairs with?
As with all trading, you need a decent broker if you are going to stand half a chance at successful forex trading. You can compare the best forex brokers here or read our reviews of these top forex brokers.
What are Currency Pairs?
Currency pairs are classically defined as exchange rates that include the US Dollar as one of their components. However, since the launch of the Euro or European single currency, the definition has been extended to include FX rates that include the Euro (Other FX rates that don’t contain the Euro or the dollar are known as crosses).
FX pairs are delineated by a combination of two, three-letter mnemonics or codes.
For example, USDJPY 105.75is the notation for the dollar-yen rate.
These currency rates are known as FX pairs because they are comprised of two elements, which are known as the base currency and the quote currency.
The base currency is the first-named currency, in the above example, the US dollar, USD.
The quote currency is the second named currency which in this example is the Japanese yen, JPY.
FX rates are simply an expression of the comparative worth of two currencies and the figures 105.75 tell us that it takes 105.75 yen to be able to buy 1 US Dollar.
Are Major Forex Pairs the best to Trade?
FX rates are further categorised as being either major or minor pairs or crosses, the distinction between these two groups is based on the size of their respective underlying economies and the level of turnover in that currency within the FX markets. FX majors represent those currencies from the world’s largest economies, and which have a high turnover in FX markets. The minors are currencies from smaller economies which are less actively traded.
FX majors are generally more liquid and well researched and there is usually plenty of information and news flow to keep traders active in them. Against that FX majors tend to be widely followed and can be crowded places to trade. Given their popularity, it can be hard for individual traders to find an edge.
Minors, on the other hand, are often less liquid and not so well researched or popular, that means that it may be easier for traders to find an edge or advantage in the minors.
However, it may not be as easy to enter or exit trades in the minors, particularly in sessions that are well away from their home markets.
What were the best forex pairs to have traded in 2018?
The simplest way to answer this question is to look at the performance of actively traded currencies throughout 2018 in doing that we soon discover that the US dollar was pretty dominant over the year with only three currencies of any note making gains against the US currency over these 12 months.
Currencies that gained vs the USD
The gainers were the Japanese yen, the Thai baht and the Mexican peso, however only the yen had anything like a decent return gaining +2.64%. Traders would have done far better to have backed the dollar and sold pretty much everything else, as we can see in the chart below.
Source Good Money Guide Research
Currencies that dropped vs the USD
The weakest performers, those making the biggest losses against the dollar in 2018, were the South African rand, the Australian dollar and the Indian rupee, though the Canadian dollar was not far behind.
In each case, the currency’s weakness reflected concerns about US trade policy, commodity prices and or the path of US interest rates.
US rates were seen as likely to climb throughout most of 2018, higher interest rates or the prospect of them, tends to drive a currency higher against its rivals and that’s what happened here.
The best forex pairs to trade 2019
The best pairs to trade in 2019 or indeed at any time are likely to be those that reflect what is going on in the world currently, both economically and politically.
Big-picture themes into the end of this year are the possible escalation of the trade war between the US and China, the prospects for the US economy, after ten years of expansion, as well as the Feds ability to support the US economy if a downturn is caused by the US-China trade war.
Elsewhere we have the ongoing, and as yet, unresolved issue of Brexit, as well as a change of leadership in many EU institutions, including the European Central Bank at a time when the Eurozone economy is slowing once more. Farther afield political unrest in Hong Kong and tensions in the Middle East all add to the mix.
Trading market sentiment
The good news for currency traders is that certain FX rates have become synonymous with particular economic and political influences, for example, the AUDUSD is sensitive to changes in sentiment around global trade. Australia is a large trading partner of China and the USA.
By the same token, as we saw in 2018 the South African Rand is sensitive to issues that affect emerging markets. Such as changes in commodity prices and or sentiment towards them. This can show up in its exchange rates particularly against the US dollar (in which most commodities are priced) dollar rand has the ticker USDZAR.
Sterling exchange rates, against both the Euro and the US dollar reflect the markets thinking on Brexit and the prospects for the UK economy thereafter. While USDJPY or dollar-yen is seen as a safe haven and the yen often strengthens when markets are in a risk-off mood, that can be caused by heightened political tensions or economic uncertainty, both of which the markets dislike.
In terms of FX performance year to date the table below shows us the returns of selected pairs and crosses in 2019 thus far.
Source investors intelligence
What are the best currency pairs to trade at night?
FX markets operate 24 hours a day 5 days a week they are truly global trading starts in Asia moves across the Middle East and into Europe and London in particular and then onto New York and the USA so, night time trading for those based in Europe might be the early evening when the New York session is underway but the London session has closed. Traders operating at night time are unlikely to notice too much of a difference.
However, we should acknowledge that once London has shut up shop for the day there will be fewer market participants, that’s offset to some extent by the fact that many of the biggest players in the FX markets are the major American banks.
Generally, though, markets can become less liquid after the US close into the Asian open.
In short trading in the liquid majors is likely the best strategy, though as we saw back in January 2019, with the flash crash in the Japanese yen. Even one of the most widely traded currencies can suffer from limited liquidity out of hours, which in this case was exacerbated by an extended New Year’s holiday in Japan.
Which is the best currency to trade right now?
Again, it very much depends on what you are looking but if you are looking for volatility and trading opportunities that this can create then the pound sterling is probably your best bet.
The political situation in the UK seems to shift almost every day with the pound weakening on heightened prospects for a no-deal Brexit and rallying if news breaks that make a disorderly Brexit less likely. That said changes at the top of the EU and ECB and the war of words between the White House and the Federal Reserve mean that both the dollar and the euro are also likely to remain centre stage until the year-end.
Which currency pair is most profitable in forex?
This is not something that has a single quantifiable answer, after all, profitability is likely to be highly variable from trader to trader and will depend on other factors such as time scales, the frequency of trading, risk-reward ratios and the amount of leverage employed.
What’s more, if we view FX trading as essentially a zero-sum game, that is one with a buyer for every seller and a seller for every buyer. Then it follows that for every winner there must also be a loser. If I trade against you and I make a profit, then logically you must make a loss and vice versa.
In those circumstances, the concept of the “most profitable pair” doesn’t really make any sense. What can say however is what is the most actively traded currency pair and that is EURUSD. Which according to data from the BIS (the central bank’s banker) turns over some 1.59 trillion dollars per day on average, almost fifty per cent more than the yen and double the daily turnover of the pound in dollar terms. By comparison, the total daily turnover in FX markets averaged just over 5 trillion dollars according to the BIS 2016 data.
Most predictable currency pairs
Predictability is not something that is often associated with the FX markets there are currencies which are pegged to a benchmark such as the US Dollar or indeed to a basket of other currencies, the most famous currency peg of recent times was that of the Swiss franc to the euro. Under which the Swiss national bank sort to limit the appreciation of the Swiss currency to maintain the competitiveness of Swiss exports. Yet despite imposing negative interest rates and selling their own currency, the Central bank was unable to stem the flow of funds moving into the franc, and famously in January 2015, the SNB pulled the plug letting the franc find its own level against the Euro.
The instrument that has had one of the strongest long-term trends over the last eight years is not a currency pair but rather a trade-weighted basket. That is a currency compared to the performance of the currencies of its major trading partners, In this case, the dollar index.
Source Trading Economics
The dollar index has been trending higher since early 2011 whether that trend can continue through the balance of 2019 and 2020 is a matter of ongoing debate among traders.
The most traded currency pairs 2018
There is no central exchange or counterparty in FX markets and detailed volume figures are published sporadically at best and even then, not necessarily by all participants. However, we can get a good idea about which were the most traded currencies in a given year thanks to surveys conducted by the Bank of England among the major FX players in London. Which is the largest FX marketplace in the world. The table below is drawn from just such a survey, that was conducted during October 2018 the table shows the percentage of average daily turnover by currency in both April and October 2018 we can see that the dollar was involved in around 88% of transactions, the Euro in just over 36% and both the British pound and Japanese yen in around 16% each during 2018.
Source the Bank of England semi-annual FX survey
The best currency to invest in in 2019?
Investing in a currency implies a long-time horizon and ownership of the underlying assets these characteristics are not usually associated with the short-term margin trading of FX pairs.
To invest in a currency, you would probably want to consider a deliverable transaction where you take ownership of the underlying currency of your choice. Alternatively, you can buy assets denominated in the currency you wish to invest in and gain exposure to the currency in that way.
For example, if you are an Australian investor with Australian dollars and you buy European shares denominated in Euros you have exposure to both the underlying and the euro Aussie dollar exchange rate or EURAUD rate. You can also try to exploit long-standing relationships between stock indices/equities and national currencies. For example, both Dax 30 and the FTSE 100 indices are full of exporters whose share prices often benefit as the pound or the euro weaken and vice versa. Of course, it is always a good idea to seek professional advice before making an investment to establish that they are suitable for your circumstances and appropriate to your needs.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.