Currency Pairs: How to Select and Trade?

How to choose currency pairs in forex trading? Selecting and trading currency pairs involves several steps and considerations. Here’s a simple guide to help you get started.

Quick insights

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Currency pairs

A currency pair is a way to quote the value of one currency against another. It consists of two currencies: the base currency (first listed) and the quote currency (second listed). A currency pair indicates how much of the second currency is required to purchase one unit of the first currency.

Trading currency pairs happen in the forex market, the largest and most liquid market globally. The forex market allows for buying, selling, exchanging, and speculating on currencies. It operates 24 hours a day, five days a week, and supports international trade and investment. Currency pairs show a bid price for buying and an ask price for selling.

For more understanding, read: What is currency pairs in Forex Trading?

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Types of currency pairs

There are many currency pairs globally, and their total number changes over time. Currency pairs are categorized based on their daily trading volume.

Major currencies pairs

The currencies that are traded the most with the U.S. dollar are called major currencies. These include:

• EUR/USD: Euro vs. U.S. dollar
• USD/JPY: U.S. dollar vs. Japanese yen
• GBP/USD: British pound vs. U.S. dollar
• USD/CHF: U.S. dollar vs. Swiss franc
• AUD/USD: Australian dollar vs. U.S. dollar
• USD/CAD: U.S. dollar vs. Canadian dollar

The last two pairs, AUD/USD and USD/CAD are called commodity currencies because Canada and Australia are rich in commodities, affecting their prices.

The currency markets start trading on Sunday night and close on Friday at 5 p.m. Eastern Time. Major currency pairs generally have the highest trading volume and are available for trading 24 hours a day, Monday to Thursday.

Minor currencies

Currency pairs that don’t include the U.S. dollar are called crosses or minor currencies. These pairs usually have slightly larger spreads and are less liquid than major currencies, but their markets are still fairly active. Common crosses include:

• EUR/GBP: Euro vs. the British pound
• GBP/JPY: British pound vs. Japanese yen
• EUR/CHF: Euro vs. Swiss franc

Exotic currency pairs

Exotic currency pairs include currencies from emerging or developing markets. These pairs tend to have lower liquidity and larger spreads. These include:

• USD/SGD: U.S. dollar vs. Singapore dollar

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How to choose forex pairs to trade

Choosing the right forex pairs to trade is important for successful trading. The forex market offers a wide range of currency pairs, each with unique characteristics and behavior. Here are the simple 10 steps to follow:

Evaluate market volatility

• Volatility refers to how much a currency pair’s price moves over a period. Higher volatility means more trading opportunities but also more risk.
• Choose volatile pairs if you’re comfortable with higher risk or less volatile pairs for more stability. Economic news, geopolitical events, and central bank announcements can influence volatility.

Analyze economic indicators

• Economic fundamentals like interest rates, GDP growth, inflation, employment data, and political stability impact currency values.
• Follow economic calendars, news outlets, and central bank statements to stay informed. Understanding these fundamentals helps you make better trading decisions.

Utilize technical analysis and chart patterns

Technical analysis involves studying historical data to find patterns that repeat.

• EUR/USD often has a range of trading patterns.
• GBP/JPY can show trend trading patterns.

By studying a pair’s historical data, you can discover profitable patterns.

Consider currency pair correlations

Currency pairs can have positive, negative, or no correlation:

• Positive correlation: Pairs move in the same direction (e.g., EUR/USD and GBP/USD).
• Negative correlation: Pairs move in opposite directions (e.g., EUR/USD and USD/CHF).
• Understanding these correlations helps you manage risk and diversify your trading portfolio. For instance, if you hold positions in positively correlated pairs, a move in one can affect the others similarly.

Practice with specific pairs on a demo account

• Before using real money, practice trading specific pairs on a demo account.
• Familiarize yourself with the pairs’ characteristics and price movements. Develop and refine your trading strategies and test your risk management skills.
• Gain valuable experience and confidence, which can be crucial when you start trading with real money.

Align your trading style and timeframe

• Short-term traders: Focus on highly liquid pairs with tight spreads and high volatility, like USD/JPY, GBP/USD, or GBP/JPY.
• Long-term traders: Look for pairs influenced by macroeconomic trends, like AUD/USD and CAD/USD.
• Swing traders: Choose pairs with strong trends on a daily chart.

Limit your focus to a few pairs

• Stick to one to five pairs and become an expert in them. Trading too many pairs can lead to poor decisions.
• If your trading performance is negative, review your strategy instead of frequently changing pairs.

Test and evaluate

• Test your trading strategy with demo accounts or backtesting software before using a live account.
• This helps you identify which pairs work best with your strategy and objectives. Testing different pairs builds confidence and increases your chances of being profitable.

Continuously monitor and adjust

• Forex markets are constantly changing.
• Continuously monitor the pairs you’re trading and be ready to adjust your strategy based on market conditions and your trading goals.

Seek professional advice 

• Seek guidance from experienced traders, forex mentors, or market analysts.
• Engage with trading communities and forums to gain insights and refine your decision-making process.

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Types of trading strategy

The selection of a currency pair will also depend on your trading strategy.

Scalping

• Scalping is about making quick trades to earn small profits.
• Timeframe: Seconds or minutes.
• Traders buy and sell assets rapidly, taking advantage of small price changes.

Day trading

• Day trading involves buying and selling assets within the same trading day.
• Timeframe: Minutes or hours.
• Traders close all their positions by the end of the day, profiting from small price movements.

Swing trading

• Swing trading involves holding positions for a few days to a few weeks.
• Timeframe: Days to weeks.
• Traders aim to capture larger price movements that occur within trends.

Trend trading

• Trend trading focuses on following the market’s overall direction.
• Timeframe: Varies (can be short-term or long-term).
• Traders only open trades in the direction of the trend, either up or down.

Position trading

• Position trading involves holding positions for a long time, from weeks to years.
• Timeframe: Weeks, months, or even years.
• Traders rely on fundamental analysis to find assets with strong long-term growth potential.

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Conclusion

Choosing and trading currency pairs in forex involves understanding the pairs’ types, including majors, minors, and exotics, and considering factors like volatility, economic fundamentals, trading hours, exchange rates, and technical analysis.

Select pairs based on your trading style—whether you’re a scalper, day trader, swing trader, trend trader, or position trader. Test strategies on demo accounts, focus on a few pairs to gain expertise and stay updated with market news and expert insights. This approach helps manage risk, make informed decisions, and enhance your trading success.