Forex trading is all about buying and selling currency pairs to profit from exchange rate fluctuations. Currency pairs are also called securities. Unlike equities and commodities, currencies are paired in a sell-buy or a buy-sell pattern. Which pair(s) to trade is a big question to answer. There is no central source of information to figure out how to rank currencies. Currency pairs can be classified based on volatility and liquidity, spread and volume of trade. The cluster of most actively traded pairs is considered as Majors. They include USD/JPY, GBP/USD, EUR/USD, NZD/USD, AUD/USD, USD/CHF and USD/CAD. Majors account for more than 70% of the total FX turnover.
EUR/USD is the most liquid, popular and predictable pair. The pair value depends on the monetary policy of the European Central Bank (ECB) and the US Federal Reserve. Price quotes are sensitive to fundamental factors. The overall economic health of the US and the EU, dynamics of raw materials, financial statements of large corporations and commodity markets have a direct impact on trading the EUR/USD pair. Price dynamics can be predicted using technical indicators.
USD/JPY is the second level of liquidity pool in the FX market. It is the top currency of the Asian trading and accounts for about 17% of the total market turnover. The pair is also sensitive to fundamental factors. Price dynamics can be predicted using the vital economic data and the means of technical analysis. Characterized by high volatility, the pair offers professional traders the best trading opportunities.
GBP/USD accounts for more than 12% of the total trading volume. It is the most popular and traded pair amongst expert traders focused on short-term aggressive strategies. Price quotes are sensitive to fundamental factors, the actions of the Bank of England and statistical data on the state of the British economy. The pair has high volatility, allowing you to maximize profits in short-term.
AUD/USD and USD/CAD
AUD/USD and USD/CAD are less liquid compared to the pairs discussed earlier. They are considered to be commodity currency pairs as their prices are closely correlated with oil and gold. Australia is the biggest producer of gold, and hence, the price of the AUD/USD is highly reliant on gold prices. Similarly, Canada is one of the largest oil producers, and therefore, the price of the USD/CAD is heavily reliant on oil prices. The values of these major currencies keep fluctuating as trade volumes between the two countries change every minute.