Back to the list

The Top Five Currency Pairs to Trade

10 June 2024 12:26, UTC

When trading in the Forex market, liquidity is a crucial factor to consider. Liquidity refers to the ease with which a currency pair can be bought or sold without causing significant price changes. The more liquid a currency pair is, the easier it is to enter and exit trades at desired prices.

Numerous currency pairs are available for trading in the Forex market, but some are more liquid than others. In the Forex market, some currency pairs exhibit more robust and consistent trends than others. Traders favor trending currency pairs as they offer opportunities for potential profit through trend-following strategies. Here are five top currency pairs to use that are liquid and have trending characteristics.

Why is the Trend Your Friend?

In forex trading, the saying “the trend is your friend” is a famous adage among traders and is often used as a guiding principle when making trading decisions. The reason why following the trend is considered advantageous in currency trading can be attributed to several key factors.

One of the primary reasons why following the trend is beneficial in currency trading is that trends can generate significant profits. When a currency pair is trending strongly in a particular direction, traders can capitalize on this trend by entering positions in the same direction as the trend. As the trend continues, traders can ride the trend and potentially capture more significant profits.

Trading with the trend can help reduce risk compared to trading against the trend. When a currency pair is trending strongly, there is a higher probability that the trend will continue in the same direction rather than reverse. By trading with the trend, traders can align their positions with market momentum and reduce the likelihood of being caught on the wrong side of a trend reversal.

Following the trend increases the probability of successful trades as trends persist over time. By identifying and trading in the direction of a strong trend, traders can increase their chances of making profitable trades. Trend-following strategies are based on the premise that the trend is more likely to continue than to reverse, leading to higher success rates in trading.

Trading with the trend can help simplify decision-making for traders. By focusing on trading in the direction of the trend, traders can avoid the complexity of trying to predict market reversals and instead follow the market’s direction. This approach can help traders avoid emotional decision-making and reduce the cognitive load associated with trading.

The concept of “the trend is your friend” is rooted in market psychology. Market participants tend to follow trends and exhibit herd behavior, leading to self-reinforcing price movements in the market. By trading with the trend, traders can align themselves with the prevailing market sentiment and take advantage of the collective behavior of market participants.

Trading with the trend is advantageous in currency trading due to the profit potential, reduced risk, increased probability of success, simplified decision-making, and alignment with market psychology. By following the trend, traders can increase their chances of making profitable trades and achieve success in the competitive Forex market.

What are Major Currency Pairs

Major currency pairs are the most widely traded in the Forex market and typically include the currencies of the world’s largest economies. The major currency pairs are characterized by high liquidity, tight spreads, and a high trading volume, making them popular choices among traders. All major currency pairs have the base currency or the counter currency, which is the US dollar. The main major currency pairs include:

  • EUR/USD (Euro/US Dollar)

  • USD/JPY (US Dollar/Japanese Yen)

  • GBP/USD (British Pound/US Dollar)

  • USD/CHF (US Dollar/Swiss Franc)

  • AUD/USD (Australian Dollar/US Dollar)

  • USD/CAD (US Dollar/Canadian Dollar)

  • NZD/USD (New Zealand Dollar/US Dollar)

Major currency pairs are the most liquid currency pairs in the Forex market, meaning there is a high volume of buyers and sellers. This high liquidity ensures that traders can enter and exit trades quickly and easily without significant price slippage.

Major currency pairs typically have tight spreads, which refers to the difference between the bid and ask prices. Tight spreads reduce trading costs for traders and allow them to execute trades at more favorable prices.

Financial news outlets, analysis reports, and market commentary cover major currency pairs, making them more accessible and well-understood by traders. This accessibility allows traders to stay informed about factors influencing the currencies in the pair and make more informed trading decisions.

Major currency pairs have a deep market depth, meaning many active participants are trading these pairs. This market depth provides traders ample liquidity and ensures enough buyers and sellers in the market to execute trades efficiently.

Major currency pairs are closely tied to the economies of the countries involved, and economic events and data releases from these countries can significantly impact the currency pair’s price movements. Traders often like to trade major currency pairs because they can take advantage of economic events and news releases to profit from price movements.

EUR/USD (Euro/US Dollar)

The EUR/USD is the most traded currency pair in the Forex market, accounting for approximately 30% of all trading volume. This pair is highly liquid due to the large trading volume and the influence of the Eurozone and the United States on the global economy. The EUR/USD pair is known for its tight spreads and high trading activity, making it a favorite among Forex traders.

USD/JPY (US Dollar/Japanese Yen)

The USD/JPY is another highly liquid currency pair popular among traders. This pair represents the exchange rate between the US dollar and the Japanese yen. Japan is one of the largest economies in the world, and the Japanese yen is considered a safe-haven currency, making the USD/JPY pair a popular choice for traders during market uncertainty.

GBP/USD (British Pound/US Dollar)

The GBP/USD, or the “Cable,” is a liquid currency pair representing the exchange rate between the British pound and the US dollar. The UK and the US have strong economies and significant influence on the global financial markets, contributing to this pair’s liquidity. The GBP/USD is known for its volatility, making it an attractive option for traders looking to capitalize on price movements.

USD/CHF (US Dollar/Swiss Franc)

The USD/CHF is a liquid currency pair representing the exchange rate between the US dollar and the Swiss franc. Switzerland is known for its stable economy, and the Swiss franc is considered a safe-haven currency, contributing to this pair’s liquidity. The USD/CHF is popular among traders looking for a safe-haven asset during economic uncertainty.

AUD/USD (Australian Dollar/US Dollar)

The AUD/USD is a liquid currency pair representing the exchange rate between the Australian and US dollar. Australia is a significant exporter of commodities, and commodity prices often influence the Australian dollar. The AUD/USD pair is popular among traders looking to trade the commodity markets and take advantage of price movements in commodities such as gold, iron ore, and coal.

What Types of Strategies are Used to Trade Major Currency Pairs

Traders use several trading strategies to trade major currency pairs in the Forex market. These strategies vary in complexity and suitability for different trading styles and risk tolerances. Some common trading strategies used to trade major currency pairs include trend following, range trading, breakout trading, and news trading.

Trend following is a popular strategy that involves identifying and trading in the direction of prevailing market trends. Traders use this strategy to capitalize on price movements in major currency pairs exhibiting strong and sustained trends. Trend-following strategies often use technical analysis tools such as moving averages, trend lines, and indicators like the Moving Average Convergence Divergence (MACD) to identify trends and enter trades in the direction of the trend.

Range trading involves identifying and trading price ranges or consolidation zones in major currency pairs within these boundaries. Traders using this strategy aim to buy at the lower boundary of the range and sell at the upper boundary, profiting from price oscillations within the range. Range trading strategies may use support and resistance levels, chart patterns, and oscillators like the Relative Strength Index (RSI) to determine entry and exit points.

Breakout trading involves entering trades when the price of a major currency pair breaks out of a predefined range or consolidation zone. Traders using this strategy anticipate that the breakout will lead to a significant price movement in the direction of the breakout. Breakout traders may use technical indicators, chart patterns, and volume analysis to identify potential breakout opportunities and enter trades accordingly.

News trading involves trading major currency pairs based on economic data releases, central bank announcements, geopolitical events, and other news events that impact the currency markets. Traders use this strategy to capitalize on market volatility and price fluctuations following significant news releases. News traders may employ fundamental, market sentiment, and technical analyses to make trading decisions around news events.

The Bottom Line

In conclusion, the top five currency pairs to trade with the most liquidity globally are EUR/USD, USD/JPY, GBP/USD, USD/CHF, and AUD/USD. These highly liquid pairs offer tight spreads and high trading volume, making them attractive choices for Forex traders of all levels. Considering liquidity when choosing a currency pair to trade is essential, as it can significantly impact trading strategies and profitability.