When starting out as a forex trader, one of the most difficult decisions is choosing the suitable currency pair. Along with many different components like position size, leverage, and length of time, the currency pair that you choose will directly impact the amount of success you will have. Below we will list out some beginner-friendly currency pairs and analyse the characteristics that make them ‘beginner-friendly’.
What to consider when choosing a currency pair?
Below are four main considerations when choosing a suitable currency pair for your trading goals.
Volatility is how much the exchange rate of a currency fluctuates relative to the one they are traded against. A good way to imagine the concept of volatility is through vectors. It all depends on the direction and magnitude of the price movement.
The volatility of a currency pair depends on its liquidity. They have an inverse relationship – higher liquidity means lower volatility and vice-versa.
As a new trader, you should look for trading pairs with low volatility to reduce the inherent risk of a spike or dip in price that normally comes with a volatile currency pair. This will help you learn more about the general sentiment of the market, as higher liquidity pairs are where most of the trades happen.
Volume links directly to the previous point of volatility. Higher volume means an individual has less power; therefore, there is less risk of ‘rug pulling’ or ‘pump and dump’ schemes.
Higher trading volumes also mean there are clearer trends and more information available about the currency pair. When you first start out as a trader, having access to information and learning the process is incredibly important. You will learn more and faster trading a currency pair with higher volume.
Time of activity
This is a factor that is often overlooked by many people. You need to trade at a time where many people are trading in the country where the currency is used. For example, if you live in China, you should trade USD at night or find a currency that fits with your trading time.
This will result in higher liquidity, more information, and a higher profit margin.
Your knowledge of the country
Your level of understanding of a country’s economic, sociological and political situation will determine whether you have a competitive advantage over other traders. There are nuances within these categories that will affect the exchange rate of a currency.
Therefore, it is advisable that you choose a country you understand well. This will help you make speculative medium to long-term trades that have the potential to be extremely profitable.
Benefits of choosing the right currency pairs
There are many benefits that will give you a head start in the right direction if you choose the correct currency pairs.
Firstly, it is one less thing to think about. As a forex trader, there are so many factors you need to be on top of at one particular moment. You will need to do chart analysis, research market sentiments, and keep track of your trading progress. If you know which currency pairs you will be trading and their general characteristics, some of these factors will be habitually ingrained into you so that you can have more brain capacity to do analysis on variables that are changing.
There is a famous quote between successful people that states, “Work smarter and not harder”. By choosing a currency pair that has an abundance of data and information, you will not have to work extremely hard to find data or even make your own analysis.
The beginner-friendly currency pairs
Although some of the criteria mentioned above are personal to each trader, volume and volatility are two things that will be constant regardless of who you are. These currency pairs ensure high volume, liquidity, and volatility.
|Australian dollars & US dollars
|US dollars & Swiss francs
|US dollars & Japanese Yen
|New Zealand dollars & US dollars
|Euros & US dollars
|US dollars & Canadian dollars
|Sterling Pound & US dollars
The currency pairs above are ordered from lowest volatility to highest volatility in the list of ‘least volatile currency pairs’.
Something that could come as a surprise is that the GBPUSD pair is at the bottom of this list. Although the GBPUSD pair is very popular and has high liquidity, the political situation of these two countries recently with America’s unrest and Britain’s Brexit saga has increased the volatility of this particular pair. The majority of traders who opt to trade this pair have a good grasp of American and Britain’s politics and a firm understanding of how different policies affect the exchange rate of a currency.
An interesting pattern that we observed is that these pairs all include USD – which many deem to be the international currency. Therefore, a good strategy if you are willing to take more risk is using the USD as a base currency and using the currency of another country. This increases the risk, but there will also be a higher reward.
A recommendation to non-US citizens will be trading the USD relative to your local currency. You will have knowledge of the social, economic, and political situation in your country and will only have to follow US news.
Choosing the correct currency pair is the first major step towards being a successful forex trader. Beginners should consider pairs that have high liquidity, low volatility, and ample information. You should also focus on the currency that you know well and use that as a competitive advantage over other traders.