Currency pairs or forex pairs are an essential element for all traders to understand when entering this market. Our aim here is to support traders looking to solidify their foundational knowledge of the forex market - the difference between major and minor forex pairs, how currency pairs work and how to read them - so they can adopt a strategic approach based on key factors including volume, volatility, and session timing.
What Are Forex Currency Pairs?
We have a detailed guide to what forex is but we'll provide a short summary of currency pairs here: they're comprised of two national currencies, both with independent exchange rates, joined for trading on the forex market where the value of one currency is quoted against the other. Currency pairs utilise three-letter currency codes such as EUR for euros, GBP for British pound sterling and USD for US dollar.
Currency pairs compare the value of one currency to another, with the first listed currency representing the base currency and the second the quote currency. Values are defined by indicating how much of the quote currency is required to purchase one unit of the base currency.
For example, in the case of a major pair such as EUR/USD, traders would buy the base currency (EUR) and sell the quote currency (USD). When the pair is sold, the reverse action takes place – the base currency is sold and the quote currency received.
Major, Minor and Exotic Pairs: The Three Currency Pair Types Explained
There are three main categories of currency pairs – major, minor and exotic. Major pairs act as the foundation of the forex market. They're "major" because they're the most frequently traded pairs across the global markets with the highest liquidity, tightest spreads and (usually - but nothing is guaranteed) lowest volatility.
Most major forex pairs include the US dollar (USD) paired with another of the most widely traded currencies on the global market, such as the British pound (USD/GBP), Australian dollar (USD/AUD) and the Japanese yen (USD/JPY). There are widely considered to be seven core major forex pairs, including the above three and USD/CHF (Swiss franc).
Minor currency pairs, also known as cross-currency pairs, are those that do not involve the US dollar but do include some of the other major global currencies. Popular examples include EUR/GBP, GBP/JPY, EUR/AUD and AUD/JPY.
Minor currency pairs are considered to have wider spreads and slightly lower liquidity than the major currency pairs, resulting in slightly higher volatility. Again, trading of this nature may often involve high and unexpected volatility. The most popular minor currencies by trading volume are those currency pairs that include individual currencies that are also majors.
Exotic currency pairs are those currencies associated with emerging markets. These pairs typically include one major currency and one that trades in far lower volume (the exotic pair). Examples include USD/TRY (US dollar/Turkish lira), USD/THB (US dollar/Thai baht) and USD/ZAR – US dollar/South African rand. Exotic pairs have far less liquidity and much wider spreads than both major and minor currency pairs. They are widely considered to be the most volatile forex pairs.
How to Read and Interpret a Currency Pair
Forex currency pairs are presented with a clear structure indicating the exchange rate between two currencies.
For example: if GBP/USD is 2.18, this means that 2.18 US dollars will buy one British pound sterling, or that 2.18 USD is worth 1 GBP.
Alongside the pricing, forex trading platforms will also display spread and pip value. Tight spreads are typically associated with lower trading costs and markets with high liquidity, while wider spreads often indicate both lower liquidity and higher volatility.
Pip value (“point in percentage” value) refers to the smallest unit price movement of a currency pair. For most forex pairs (except for those including the Japanese yen), a pip usually represents a movement of 0.0001. Pip value depends on both the specific currency pair and the size of the trade – it acts as a useful risk management trading tool.
The Best Forex Pairs to Trade (and Why)
For beginners and active traders, the best currency pairs for forex trading will typically include major forex pairs. As the most frequently traded currency pairs, they are easily accessible and offer high liquidity meaning plentiful opportunities to buy and sell without affecting the price. They also have tight spreads, thereby reducing trading costs and improving potential profitability.
Stability is another key feature of the major forex pairs. They typically have low volatility (although this can easily change, sometimes even when it is least expected) and more predictable pricing. This (usually) allows traders to more effectively navigate market movements and utilise technical analysis to make informed strategic decisions.
Understanding Forex Pair Correlation
Defined as the connection between two currency pairs and typically exhibited as a percentage value, correlation is an integral part of forex trading. Forex trading pairs explained in brief is essentially that:
- Positive correlation takes place when pairs move together and their values increase simultaneously.
- Negative (or inverse) correlation takes place when pairs move in opposite directions (one increases in value while the other decreases).
Correlation can be effectively integrated into a trading strategy and used to the trader’s advantage. When a negative correlation is identified, traders may use hedging with a view that price increases and potential profits in one currency may be offset by losses in the other. Positive correlations can be used to spread risk and improve diversification.
Pairs trading may also be utilised, whereby traders identify two currency pairs with a strong historical correlation and take both long and short positions on the assets. With the view that the pairs will ultimately move together again, this is a way to assess potential outcomes using a long lens (although this strategy can involve a fairly high level of risk).
Most Correlated and Inversely Correlated Pairs
Some of the most common correlated pairs include the following: EUR/USD, GBP/USD). At the other end of the scale, some of the most inversely correlated pairs (or opposites) are USD/JPY vs AUD/USD.
Choosing Currency Pairs by Trading Session
There are two factors to consider when choosing currency pairs by trading sessions. The first is aligning your choices with your desired trading style, strategy, hours and outcomes. The second is to match pairs to the time zones that fit best with these factors.
The key time zones to familiarise yourself with are as follows:
- London (8am – 5pm GMT)
- New York (8am - 5pm EST)
- Sydney (8am – 5pm AEST)
- Tokyo (8am – 5pm JST)
Generally, the most popular currency pairs (especially for beginner traders) are those with a high liquidity, enough volatility for a good profit margin and those with a good volume available at the time of day you wish to trade. The London session has the highest average pip movement among major currency pairs.
A currency pair will typically see the most liquidity and price action when the sessions for the pair overlap. This is especially true when the London and New York sessions overlap (8am to 12pm EST) and traders will typically see a surge in trades during overlap periods. Overall, EUR/USD has the highest volume of all the most traded currency pairs in the world.
Risk management plays an essential role in choosing currency pairs by trading sessions, as a high volume of trading activity can also lead to high volatility. Every trader should define their risk appetite and risk management techniques in order to effectively manage volatility and best position their trades.
Most Volatile Pairs by Session
Below we have listed the most volatile pairs to trade during each major session. The major forex pairs feature prominently in many of the sessions due to their high liquidity and the way that they respond to key economic indicators.
Volatility is most common during the London and New York sessions, as well as during the overlap between the two. Even with the more minor sessions, it can be common to see increased activity and volatility during the overlap periods. It should be emphasised that volatility can occur at any time and, as with all factors of financial trading, cannot be relied upon for decision-making, but rather used as an indicator to build context.
- London: EUR/USD, USD/JPY, GBP/USD
- New York: EUR/USD, USD/JPY, GBP/USD, EUR/JPY, GBP/JPY and USD/CHF
- Sydney: As the smallest of the major sessions, AUD/USD is the most volatile pair to trade during this session.
- Tokyo: USD/JPY and EUR/JPY
How to Choose the Right Pair for Your Strategy
While forex trading can appear complex, the key is to select the most effective currency pairs in line with your chosen strategy. The very foundations of forex trading strategy vary significantly from other types of financial trading. For example, trading CFDs is based on a much broader approach considering a range of different factors, but trading forex is entirely centred around choosing the most effective pairs in line with your customised strategic approach.
Common Strategies for Trading Currency Pairs in Forex
Scalping is a common short-term forex trading strategy where positions are held for minutes or even seconds throughout the day in order to capture the benefits of small price movements. This is an intense approach that requires multiple trades to be made in a short space of time and can work particularly well with volatile markets, provided traders are confident with quick decision-making and an intensive process.
Swing trading also focuses on shorter-term trades, but positions are held for weeks or months as opposed to minutes/seconds. It is a less time-consuming, more hands-off approach suited to traders who do not want to – or do not have the time to - constantly monitor the markets. It comes with the potential for great profits but also larger losses.
Taking a slightly different approach, trend trading relies on a range of technical indicators, including historical data analysis, to try and predict market movements and gain a deeper understanding of market momentum.
The ideal scenario with trend trading is identifying a trend at the beginning and entering a trade at the earliest possible opportunity. Traders must also use their technical knowledge and indicators to exit the market before the trend reversal.
How Pair Volatility and Correlation Impact Trading Choices
Once traders have established their preferred strategic approach, the next phase is to select currency pairs.
Volatility
Volatility is one key factor to consider – currency pairs may experience volatility due to geopolitical events such as political instability, economic indicators such as inflation, market sentiment and changing interest rates.
The higher the volatility of each currency pair, the higher both the potential profits and the potential risks. Higher volatility pairs, such as minor and exotic pairs are more vulnerable to sudden price swings or shocks but this may also translate into more opportunities for substantial gains. The pricing of volatile currency pairs is impacted by less transparent economic factors which makes it more difficult to predict market movements and position safeguards.
In contrast, currency pairs associated with lower volatility will offer a more stable trading environment and a degree of consistency regarding price movements, but any profits are likely to be lower. There is also a level of risk involved as volatility may still occur, sometimes at a high and/or unpredictable rate, therefore, you should always prepare for the unexpected. That being said, traders can adopt different approaches to improve their potential profitability, such as adopting larger positions.
The consistency offered by lower volatility (major) currency pairs is rooted in fundamental economic factors and indicators, making it easier to more effectively apply technical analysis, build predictions and make informed decisions.
This lower volatility can also benefit traders who prefer a more stable trading environment where price movements are usually less erratic and more reflective of fundamental economic factors. Traders will also find it more straightforward to apply technical analysis to lower volatility currency pairs as the stability makes it more receptive to predicting price movements.
Correlation
In forex trading, correlation refers to how currency pairs move in relation to one another. By using a forex pair correlation calculator, traders can use correlation to their advantage. When it comes to choosing pairs, diversification and hedging represent the two main strategic benefits.
Focusing on positively correlated pairs provides opportunities for diversification, while negative correlations allow traders to hedge positions and offset potential losses. Traders may also adopt an inverse strategy, utilising negatively correlated pairs to balance market exposure. Traders may also use correlation to balance long and short positions and manage risk.
Taking things to a deeper level, traders may benefit from using detailed historical data analysis to identify specific behaviours of currency pairs and fine-tune their strategic approach. For example, pairs that have strong positive correlation due to similar economic cycles, similar responses to global risk sentiment or where both pairs represent commodity currencies. Understanding the behaviours of each pair will allow traders to build a stronger, more educated approach to ultimately optimise outcomes.
While correlation is an essential part of forex trading, it should be employed alongside appropriate risk management strategies and preferred position sizing in order to best protect the portfolio and optimise every trader’s position in line with their chosen goals. Traders should also regularly monitor the markets and stay informed about any economic activity that may impact correlated pairs and prompt an adjustment to their chosen strategy.
Getting Started with Forex Pair Trading on ActivTrades
If you're looking for the best forex pairs to trade today, it's best to start by taking advantage of the most advanced and user-friendly trading support platforms. This is the most effective way to begin a successful trading journey. The ActivTrades platform offers access to a wealth of educational resources and support to help traders at all levels consistently expand their understanding and knowledge. Among a range of advanced functionalities, ActivTrades users can access major pairs, explore tools including the correlation matrix, and start trading on the live forex markets.
This intuitive platform has been designed to offer a high-quality user experience, including clear navigation, sophisticated design, and world-class performance and security for the optimum trading experience. Users can also access a suite of technical analysis tools via the integrated Trading Central platform, including economic calendars and insights, idea generation and risk management support.
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