How to Choose the Best Currency Pair to Trade

The global forex markets attract traders because of the significant volatility, which offers multiple trading opportunities, the 24-hour operations of the market, and massive liquidity. But a common challenge beginners face is choosing the most suitable currency pair to trade. This article takes a look at building a forex strategy that aligns with your trading goals by choosing the right currency pairs. 

Understanding Major, Minor, and Exotic Forex Pairs

A forex pair involves two currencies of two different nations. While the US dollar seems to grab the lion’s share of forex news headlines, there are several other currencies of developed and emerging economies. This yields many combinations or currency pairs, giving traders a plethora of choices. Some currency pairs trade at much tighter spreads than others. This is because they are much more popular, resulting in high liquidity. This doesn’t mean you should trade only those currency pairs. In fact, the ones that are less popular tend to experience far greater volatility, presenting much more attractive trading opportunities. 

Depending on their popularity, currency pairs are classified as major, minor, or exotic, based on their daily trading volumes. 

Major FX Pairs

The US dollar dominates the FX markets, with 88% of transactions involving the greenback. Global trade and most central bank reserves are maintained in the USD, making it the most popular choice among traders. Following that, the most popular currencies are the British Pound (GBP) at 41%, the Euro (EUR) at 31%, and the Japanese Yen (JPY) at 17%. These are followed closely by the Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD), and the New Zealand Dollar (NZD). 

The currency pairs that include the USD and another popular currency are called major pairs. Some common examples are the USD/EUR, USD/JPY, GBP/USD, and USD/AUD.

These pairs have the highest liquidity and volatility, generating viable trading opportunities.

Minor Forex Pairs

Also called the cross, currency pairs in this category involve any two major currencies listed above, except the US dollar.

Major and minor pairs generate more trading opportunities and have higher liquidity that enables traders to capitalise on the volatility in these currencies.

Exotic Pairs

All other currency pairs fall into the category of exotic pairs. The USD/TRY, USD/INR, EUR/MXN, USD/CZK, EUR/SEK, USD/HKD, USD/ZAR, USD/RUB, and EUR/SGD are just some of the exotic pairs your broker might make available to you for trading. Exotic pairs usually experience lower liquidity, which means higher risk of slippage. That is why these are the least traded currency pairs. Although most Asian currencies are part of exotic pairs, the Japanese yen is the third most popularly traded currency in the world and part of the major forex pair, the USD/JPY. The Hong Kong dollar also finds a place among the top 10 most traded currencies, although the USD/HKD is considered an exotic pair.

Exotic pairs are more sensitive to economic and geopolitical events, such as unexpected election results, political scandals, or the economy surpassing analyst expectations. These currencies swing massively, giving rise to trading opportunities. However, risk management is critical to mitigate the risk associated with trading exotics.

The Most and Least Volatile Forex Pairs

Higher volatility translates into a greater number of trading opportunities. Traders use the average true range (ATR) indicator to assess the volatility of their chosen pair and make informed decisions regarding entry and exit positions.

The USD/AUD was the most volatile currency pair in 2023, with an average daily change of 1.04%. Other pairs that exhibited high volatility in the year were the NZD/USD (1.01%), AUD/JPY (0.97%), NZD/JPY (0.91%), AUD/CHF (0.82%) and CAD/JPY (0.82%). The value of a currency changes based on the country’s economic and geopolitical conditions. The US dollar, for instance, strengthened as interest rates rose, drawing more investments in the greenback. Experienced traders keep an eye on economic updates and breaking news to speculate on currencies.

While volatile pairs offer greater liquidity and more trading opportunities, pairs with low volatility offer stable trading environments. They have a lower chance of slippage, which reduces exposure to transaction risk. The least volatile trading pairs include the EUR/GBP, USD/CHF, NZD/USD, USD/CAD, and EUR/CHF. 

How to Choose FX Pairs for Day Trading

After you understand major, minor, and exotic pairs, identify the ones with a low degree of correlation. Negatively correlated currency pairs move in opposite directions, giving you the opportunity to hedge your positions. Building a trading strategy with non-correlated and negatively correlated pairs also helps diversify your portfolio. While zero correlation helps manage risk exposure, negative correlation facilitates hedging.

Next, consider your timeframe. Currency pairs with high volatility are more suitable for short-term strategies, such as high-frequency scalping, or intra-day trading. Forex pairs with low volatility are more suitable for long-term trading strategies, such as position trading.

The best way to start is to stick to a small number of pairs and trade during periods when popular forex sessions overlap. For instance, from the London and New York sessions overlap from 12:00 PM to 4:00 PM UTC, which makes it the most active timeframe in the forex markets. 

While you can trade forex OTC, a popular method among Asian traders is using CFDs. These derivative instruments allow traders to speculate on both rising and falling markets, while also lowering the entry barrier, and often alleviating stamp duty, since you do not own the underlying assets. However, since CFD trading amplifies both profit and loss potential due to leverage, risk management is essential.

To Sum Up

• The popularity of forex trading is growing among Asian countries.
• Major forex pairs involve the USD and a major currency.
• Minor currency pairs involve 2 major currencies, excluding the USD.
• Exotic pairs are formed by pairing a currency of an emerging or developing economy with a major currency.
• Major currencies have higher liquidity and relatively lower volatility.
• Choose forex pairs that are negatively or non-correlated to improve hedging and risk management.

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