In the Forex market, transactions are always conducted in currency pairs because the value of one currency is measured relative to another. For example, when trading EUR/USD, you are essentially buying and selling the value of the Euro against the US Dollar.
Why Are Currency Pairs Important in Forex?
Currency pairs play a crucial role in the Forex market for several reasons:
High Liquidity in Popular Currency Pairs: Pairs like EUR/USD and USD/JPY have high liquidity, meaning traders can enter and exit the market with minimal spreads and transaction costs.
Reflection of a Country’s Economic Status: The value of a currency pair represents the economic strength of two countries. For instance, EUR/USD reflects the economic differences and monetary policies between the Eurozone and the United States.
The Basis of Forex Trading: In Forex, no currency is traded alone; instead, it is always valued relative to another currency. This makes understanding currency pairs and their interactions essential.
Diverse Trading Opportunities: With various major, minor, and exotic currency pairs, traders can select different markets based on liquidity, volatility, and their trading strategy.
Impact of Political and Economic Conditions: Changes in monetary policies, central bank decisions, and economic events directly affect currency pair exchange rates. As a result, analysts and traders closely monitor these pairs to make informed decisions.
Best Currency Pairs for Forex Trading
In the Forex market, choosing the right currency pairs plays a significant role in traders’ success. Below are some of the best trading currency pairs along with their key features.
EUR/USD Currency Pair
The EUR/USD pair is the most liquid and widely traded currency pair in the Forex market. Due to its high trading volume, it offers low spreads and minimal transaction costs, making it an ideal choice for both beginner and professional traders.
USD/JPY Currency Pair
The USD/JPY pair also boasts high liquidity and reasonable spreads. This pair offers balanced volatility, providing good trading opportunities. Monitoring the Bank of Japan’s policies is crucial when analyzing this pair, as policy changes can significantly impact its price movements.
GBP/USD Currency Pair
The GBP/USD pair is known for its strong volatility and significant price swings, making it an attractive option for traders utilizing short-term and day trading strategies. This pair is highly influenced by economic news from both the UK and the US, so traders should pay close attention to the economic calendar.
USD/CHF Currency Pair
The USD/CHF pair is heavily influenced by Switzerland’s economic status and the Swiss National Bank’s policies. This pair tends to behave steadily during periods of economic uncertainty. Its high liquidity also makes it a popular choice among traders.
AUD/USD Currency Pair
The AUD/USD pair has a strong correlation with gold prices and raw materials. This correlation creates excellent trading opportunities for traders who focus on commodities markets. This pair has moderate spreads and balanced volatility, making it suitable for various trading strategies.
USD/CAD Currency Pair
The USD/CAD pair is closely tied to global oil prices. This pair offers predictable price movements, making it an ideal choice for professional traders who rely on fundamental analysis. Keeping track of oil price changes and Canada’s economic policies is crucial for accurately analyzing this pair.
Choosing the right currency pair based on your trading strategy, market conditions, and experience is a key factor in achieving success in Forex trading.
the most voluminous Currency Pairs in the Forex market
This section examines the most voluminous Currency Pairs in the Forex market:
EUR/USD, The Most Liquid and Popular Currency Pair
This pair accounts for approximately 20% to 25% of total Forex transactions. Its popularity is due to low spreads, high trading volume, and excellent liquidity. The European Central Bank (ECB) and the U.S. Federal Reserve have the most significant influence on this pair, and any changes in interest rates or monetary policies in these regions can lead to substantial price movements.
GBP/USD, A Highly Volatile Pair with Attractive Trading Opportunities
The British Pound against the U.S. Dollar is one of the most traded and volatile currency pairs. Traders can take advantage of its high volatility and rapid price movements for short term trading and scalping strategies. However, these fluctuations also come with higher risks, especially during economic data releases from the UK or changes in the Bank of England’s policies.
USD/CAD, Driven by Oil Prices and the Canadian Economy
Canada is one of the world’s largest crude oil exporters, meaning the value of the Canadian Dollar (CAD) is heavily influenced by oil prices. When oil prices rise, the CAD strengthens, causing this pair to decline, and vice versa. Additionally, the Federal Reserve’s and the Bank of Canada’s policies on interest rates and inflation significantly impact this currency pair.
USD/CHF, A Safe Haven for Investors During Economic Crises
The Swiss Franc (CHF) is one of the world’s most stable currencies, and during economic uncertainties and geopolitical tensions, its value tends to rise. This pair has high liquidity but usually experiences lower volatility compared to GBP/USD and EUR/USD. The Swiss National Bank (SNB) plays a crucial role in influencing this currency pair.
USD/JPY, The Second Most Traded and a Safe Haven in Crises
The Japanese Yen (JPY) is considered a safe haven currency, meaning that during economic and political instability, demand for it increases. This pair offers high liquidity, moderate volatility, and reasonable spreads, making it an ideal choice for day traders and scalpers. The Bank of Japan’s interest rate decisions and U.S. economic policies significantly impact this currency pair.
AUD/USD, Influenced by Commodity Markets
The Australian Dollar (AUD) has a strong correlation with commodity markets, particularly gold and raw materials. This pair is an ideal option for traders who follow news and changes in commodity prices. Additionally, China’s economic policies play a significant role in this currency pair due to strong trade relations between China and Australia.
Factors Influencing the most voluminous Currency Pairs
The key factors affecting the trading volume of major currency pairs are as follows:
1. Commodity Markets and Correlation with Other Assets
Some high volume currency pairs, such as AUD/USD and USD/CAD, are heavily influenced by commodity prices like gold and oil. For example, an increase in oil prices usually strengthens the Canadian Dollar (CAD), while a decline in oil prices weakens it.
2. Liquidity and Global Trading Volume
The higher the trading volume of a currency pair, the lower its spread and the greater its liquidity. Currency pairs like EUR/USD and USD/JPY have the highest trading volumes due to their widespread presence in global markets, which leads reduce transaction costs.
3. Monetary Policies and Interest Rates
Central banks such as the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE), and the Bank of Japan (BoJ) directly impact currency values through their interest rate decisions and monetary policies. Generally, a higher interest rate strengthens the respective currency, while a lower interest rate weakens it.
4. Economic Data and Macroeconomic Indicators
Announcements of economic data, including unemployment rate, Gross Domestic Product (GDP), inflation (CPI), Purchasing Managers’ Index (PMI), and trade balance, can create significant volatility in heavily traded currency pairs. For example, the release of the U.S. Non Farm Payrolls (NFP) report can lead to major price movements in EUR/USD and USD/JPY.
5. Geopolitical Events and Political Risks
Wars, economic sanctions, trade tensions, and political shifts (such as the U.S. presidential elections or Brexit) have a direct impact on major currency pairs. During periods of economic uncertainty, investors often move towards safe haven assets like the Japanese Yen (USD/JPY) and Swiss Franc (USD/CHF).
Trading Volume of Currency Pairs in Different Trading Sessions
In the Forex market, different trading sessions have a significant impact on the trading volume and volatility of currency pairs. Below is an overview of the key features of each session and the most actively traded pairs during those times.
Asian Session (Tokyo): A Calm Market Opening
The Asian session typically starts quietly. Liquidity in this session is lower than in the London and New York sessions. Price movements are slower, and volatility is more balanced. This session is influenced by economic news from Japan, China, and Australia.
Popular Currency Pairs in the Asian Session:
The USD/JPY pair is the primary currency pair in this session and is influenced by the monetary policies of the Bank of Japan.
The AUD/USD pair is closely tied to Australia’s economic data and commodity prices.
The NZD/USD pair correlates with New Zealand’s economy and commodity prices.
The EUR/JPY and GBP/JPY pairs also show increased volatility in this session due to the high trading volume involving the Japanese yen.
London Session: The Highest Trading Volume and Liquidity
The London session is known as the most active trading session of the day, with the highest trading volume. High liquidity and a large number of orders reduce spreads during this period. Due to the intense volatility, this session provides numerous trading opportunities and is heavily influenced by economic news from Europe and the UK.
Popular Currency Pairs in the London Session:
The EUR/USD pair holds the highest trading volume, with low spreads and high liquidity, making it an ideal option for this session.
The GBP/USD pair experiences significant volatility and is strongly impacted by UK economic news.
The USD/CHF pair is influenced by Swiss economic data and Federal Reserve policies.
The EUR/GBP pair is also popular in the European market and offers solid trading opportunities.
New York Session: High Volatility and Large Price Movements
The New York session is one of the most active trading periods with substantial trading volume. During this session, US economic news and Federal Reserve data have a major impact on the market. The most intense volatility occurs in the early hours of this session when it overlaps with the London session. Currency pairs tied to the US dollar experience the most significant movements during this time.
Popular Currency Pairs in the New York Session:
The EUR/USD pair remains the most traded pair in this session, offering high liquidity.
The GBP/USD pair’s intense volatility provides ample opportunities for scalping and day trading strategies.
The USD/JPY pair reacts quickly to US and Japanese economic data.
The USD/CAD pair is influenced by oil prices and Canadian economic data.
The AUD/USD pair also exhibits significant movements due to its correlation with US economic indicators.
London-New York Session Overlap: The Golden Hour of Forex Trading
The overlap between the London and New York sessions marks the most active and volatile period of the Forex market. During this time, trading volume peaks, and price fluctuations become more intense. This creates ideal opportunities for short-term traders.
Best Currency Pairs for Trading During the Overlap:
The EUR/USD pair remains the most traded pair with extremely low spreads.
The GBP/USD pair shows intense volatility, offering numerous trading opportunities.
The USD/JPY pair reacts strongly to US economic news and interest rate updates.
The USD/CAD pair, heavily influenced by oil prices, presents excellent trading opportunities during this period.
Criteria for Choosing the Best Currency Pair for Forex Trading
Below, we examine the key criteria you should consider when selecting the best currency pair for trading:
1. Liquidity, High Trading Volume and Faster Execution
High volume currency pairs such as EUR/USD, USD/JPY, and GBP/USD offer high liquidity, meaning they can be bought and sold without delays and with lower spreads. High liquidity ensures that trades are executed with minimal slippage.
2. Spread and Transaction Costs, Reducing Trading Expenses
The spread is the difference between a currency pair’s buy and sell price. More popular currency pairs tend to have lower spreads, while less frequently traded pairs have higher spreads.
For short term traders and scalpers, pairs like EUR/USD and USD/JPY are better options due to their low spreads.
3. Volatility, Choosing Based on Risk Tolerance
Some currency pairs, such as GBP/USD and USD/CAD, are highly volatile, offering greater profit opportunities but also higher risks. If you prefer more stable price movements, EUR/USD and USD/CHF are safer choices.
4. Sensitivity to Economic News, Better Market Predictions
Certain currency pairs are highly affected by economic news. For example:
EUR/USD is sensitive to Federal Reserve and ECB policies.
USD/CAD reacts to oil price fluctuations.
GBP/USD is highly influenced by UK economic data.
To choose the best currency pair, monitor the economic calendar and understand how news impacts each pair.
5. Currency Correlation, Better Risk Management in a Trading Portfolio
Some currency pairs move in the same or opposite directions. For instance:
EUR/USD and GBP/USD usually move in the same direction (positive correlation).
EUR/USD and USD/CHF typically move in opposite directions (negative correlation).
If you trade multiple pairs simultaneously, consider these correlations to avoid excessive risk exposure.
6. Your Trading Style, Selecting Pairs That Match Your Strategy
Day Traders: Prefer high liquidity and low spread pairs like EUR/USD and USD/JPY.
Scalpers: Need high liquidity and low volatility pairs like EUR/USD.
Swing & Position Traders: Can take advantage of high volatility and long price movements in pairs like GBP/USD and USD/CAD.
Least Volatile Forex Currency Pairs – Ideal for Beginners
EUR/CHF (Euro/Swiss Franc): A combination of two stable currencies with smooth and predictable trends.
EUR/USD (Euro/US Dollar): One of the most popular Forex pairs with high liquidity and moderate volatility.
USD/CHF (US Dollar/Swiss Franc): A low risk trading option, especially during periods of economic uncertainty.
AUD/CHF (Australian Dollar/Swiss Franc): A mix of a commodity currency and a safe haven currency, which helps reduce extreme volatility.
USD/CAD (US Dollar/Canadian Dollar): Influenced by the oil market but generally experiences controlled price movements.
Traders who prefer to trade in low volatility currency pairs can utilize these options to reduce risk and build more stable trading strategies.
The Relationship Between Trading Volume and Liquidity in Forex
Higher Trading Volume = Greater Liquidity
When a currency pair has high trading volume, it means there are many buyers and sellers actively participating in the market. This results in faster order execution and tighter spreads. For example, EUR/USD is one of the most liquid assets in the Forex market due to its high trading volume.
Higher Liquidity = Lower Trading Costs
In currency pairs with high liquidity, the spread is lower, and trades are executed at a lower cost. This is particularly important for scalpers and short term traders who seek fast and low cost trades. In contrast, lower liquidity currency pairs typically have wider spreads, which can increase trading costs.
Low Trading Volume = Lower Liquidity and Higher Volatility
Currency pairs with low trading volume usually have lower liquidity, leading to the following:
Slower order execution and a higher risk of slippage.
Increased volatility in price charts due to a lack of liquidity to absorb large orders.
During economic news releases or times of crisis, sudden and unexpected price movements may occur in these currency pairs.
Market Hours Impact on Trading Volume and Liquidity
Trading volume and liquidity fluctuate throughout the day. When major financial centers like London and New York overlap, liquidity peaks, and transactions occur at the lowest cost and highest speed. In contrast, during quieter sessions like the Asian session, trading volume drops, liquidity decreases, and price movements become more erratic.