Forex trading is about buying or selling currency pairs. It has gained huge popularity due to the significant leverage combined with lower margin requirements. This market has also become the most liquid one in the world with nearly 8 trillion dollars traded daily during the last year. These factors make it a perfect place for those traders who are interested in high-leverage trading.
However, before starting trading there, it’s worth understanding how to trade major currency pairs. In this article, we’d like to talk about the commonly traded currency pairs and provide some tips for smarter trading.
Major currency pairs
On the Forex market, all currencies are traded in pairs. It’s simple: for buying one currency, you should sell another currency. What is a currency pair? It’s the exchange rate for two currencies traded in the foreign exchange market.
Each currency in a pair comes in a three-letter code. The first two letters are for the name of the country and the third letter is for the name of that country’s currency. As a rule, it’s the first letter of the currency’s name. For example, USD stands for US dollar and EUR stands for Euro.
Trading Forex pairs consists of a base currency and a quote currency. The left currency in a pair is the base currency, and the right one is the quote currency. A quote currency can be also called the “counter currency”.
Currency pairs are constantly in a tug-of-war against each other. The relative price of two differences is called an exchange rate. Exchange rates fluctuate depending on which currency is stronger at this point.
Currency pairs are different and come in three categories: majors, crosses, and exotics. We focus on major currency pairs.
One of the major currencies out there is always the U.S. dollar. The most frequently traded currency pairs include the US Dollar, Euro, British Pound, Swiss Franc, Canadian Dollar, Japanese Yen, Australian Dollar, and New Zealand Dollar. We’d like to describe only the top 6 most traded currency pairs. These pairs are characterized by high liquidity, tight spreads, and average volatility.
Here is the list of major currency pairs:
These currency pairs are traded in high volumes and make up more than half of the trading volume on the Forex market. The most traded currency pair is EUR/USD (“fiber”), most likely because of the dominant positions of the economies of the European Union and the United States. It is the most liquid currency pair and has tight spreads, making it the best pair for novice traders. It amounts to approximately 23% of the total trading volume. On the other hand, the pair USD to JPY is characterized by a higher volatility level and requires higher margin making. It makes it suitable for seasoned traders.
Each currency pair comes with its benefits, drawbacks, and unique characteristics. The factors that affect exchange rates between these currencies include but aren’t limited to central bank policies, economic indicators, geopolitical events, and market volatility. Therefore, the most volatile Forex pairs in 2023 are AUD/JPY, followed by NZD/JPY and GBP/EUR. A better understanding of these factors allows you to be aware of the price trends. But most traders just simplify this task and focus only on chart reading.
Tips for trading major currency pairs
Trading Forex pairs isn’t an easy task. Some tips can help you avoid major losses and join the community of winning traders. So, here we go!
1. Choose liquid currency pairs
If you’re new to Forex trading, it would be better to choose a currency pair like the EUR/USD. Then you should decide which type of analysis is better for you as a trader. Is it better to be a fundamental trader? Or, maybe you feel more confident as a technical trader? The difference between these two types of traders is in the pieces of information they tend to look at.
While a fundamental Forex trader will analyze the country’s inflation, trade balance, and gross domestic product, to name a few, technical traders look for price patterns such as triangles, flags, and double bottoms.
By analyzing both, you will become familiar with the factors that move top Forex currency pairs.
2. Determine the required leverage
How can leverage impact your Forex trading account? Let’s clarify it!
The more effective leverage you use, the greater the swings in your account equity, and vice versa. We’d recommend using less than 10 times effective leverage.
Just because you have access to a higher amount of leverage doesn’t mean you should use all of it. More leverage poses more risk to your trading account. Understanding that is of key importance when trading currencies. Many novice Forex traders wipe out their accounts because they use excessive leverage.
3. Implement risk management technique
Trading is risky. Therefore, implementing risk management strategies is a must. The most common one is stop-loss orders.
A stop-loss order is a type of trading order for limiting a trader’s potential losses on a position. When placed through the platform, it closes a position automatically if the market price reaches a specified level. This order allows traders to protect their investments from significant losses as well as manage risk exposure.
4. Choose the best trading time frame
Which time frame is the best to trade Forex? Well, this question is asked frequently by a lot of traders, especially those who are new to the market. It truly depends on your trading style and strategy.
The time you enter and close the trade depends on your trading strategy. The two most common time frames are long- and short-term ones. Main Forex trading strategies include:
- Day Trading
- Swing Trading
- Position Trading
The best time frame to trade Forex doesn’t mean a specific one. It’s possible to switch between them to not miss opportunities in the Forex market. Choosing the best currency pairs to trade also may depend on the market’s condition at that point.
5. Don’t overtrade
New traders are prone to overtrading. While markets are vivid, there is no necessity to open many positions at the same time. Sometimes, market news stimulates the opening of multiple trades, and on other days it doesn’t. If trading days are slow, it would be better to reduce the number of trades. When volatility rises, it’s best to increase the number of trades. Your goal on all occasions is to minimize risk exposure. If you see all the opportunities the market offers at this point, enter a trade and stick to a trusted trading strategy.
6. Exit trading on time
Many traders focus on the trend and a perfect entry point for a trade. As most of them lose, do they simply bet wrong each time?
The reason is that traders stay in losing trades for too long and exit winning trades too early. This leads to missing out on profits while exposing their trading accounts to further losses. The best way to manage it is to plan the exit of the trade before entering the position and stick to your plan.
7. Sharpen your skills on a demo account
Whether you are new to the Forex market or want to learn how to trade Forex currency pairs, applying for a demo account at such companies as FXCI is the right thing to do. A demo account allows you to practice trading without risking real funds as money is virtual and the trading environment is simulated.
Demo trading is a great way to build confidence before trading with real money, test your trading ideas, and gain the required experience. At FXCI, we know firsthand how important hands-on skills are when trading Forex. If you feel confident in your readiness to start trading, make a wise move – get easy access to the best Forex pairs to trade with a reliable prop firm.
8. Maintain consistency and discipline
To be successful, Forex traders should be consistent and disciplined. Traders who constantly master their trading skills and are able to control their emotions will always remain profitable. Not only does it deter loss-causing behavior but also leads to profitability in the long run. Sticking to a chosen Forex trading strategy is the best way to avoid most mistakes traders make.
The currency pairs described above generate more than 60% of the trades.
With all the provided tips in your toolbox, you can manage your position depending on what’s going on in the market. Watch the market closely and adapt to its movements rapidly to generate the best possible outcome for your trade.
As a trader, you should stick to a plan, and then be present. It’s not a difficult thing to do, especially if you enter at the right time and practice timely exit.