Forex trading is great fun and a fantastic way to generate some extra income if done correctly. What with national economies, along with their native currencies, rising and falling on an almost daily basis, it is certainly possible to make good gains from trading one currency against another, if you’re smart about it.
But, as with any market, there are certain things you should avoid and others you should gravitate towards. No market is a sure thing so there’s always some risk involved in any kind of trading. However, within the forex market at least, there are some currencies which are best avoided and others which you would be wise to pay close attention to.
This guide will help you identify which of the forex currencies (or currency pairs) tend to do well and which ones you’d be better off avoiding altogether. Please note, this guide is only meant as a suggestion and any advice given is based on our own empirical expertise but shouldn’t be considered gospel. Having said that, the following should give you a nice grounding in forex trading.
Top currency pairs
Unfortunately, there’s no global data to allow us to determine which are the most traded or most favoured currency pairs; unsurprisingly, some countries report on these sorts of things better than others and, as such, there can be no definitive list of the world’s most popular currency pairs.
However, using what data we do have at our disposal, i.e., periodic surveys done by the central banks and monetary authorities of the major global regions, it is possible to get a pretty accurate idea of the most popular trades. Here’s a list we complied to give you an idea:
No big surprises here; you’d expect Europe, America, Japan, Great Britain, and China to be among the most traded pairs. Please note, this list was put together using data from 2011, however, when comparing this list to a more recent one complied by Investopedia, you’ll see that the results are pretty much the same so, it’s fair to say that the most traded pairs tend to remain pretty consistent, year after year.
Short-term forex traders
Short-term forex traders will want to focus on the most traded currency pairs, i.e., all the ones you’ll find in the above list, because, on average, they show enough movement in the short-term to make them worth trading.
Additionally, brokerage firms, such as eToro, AvaTrade, and IQ Option, tend to offer the best (most profitable) bid/ask spreads on the most popular currency pairs. As such, if you see yourself as a ‘day-trader’ (or scalper), you’ll be best off focusing all your energy on the top forex pairs for the specific region you’re trading in to maximise returns and avoid siphoning funds into currencies which don’t move much.
Although a consistent currency is a stable currency, stability isn’t really what we’re looking for in the world of short-term forex trading; we want some volatility. As an aside, this is the reason why it’s also always a good idea to keep an eye on what’s going on politically as this can give you an idea of how a currency is going to behave (for example with Brexit; those who correctly predicted the result of UK’s 2016 referendum would have likely seen the pound’s correction coming and, as such, could have benefited financially).
To summarize, short-term forex traders should stick to dissonant pairs which show a lot of movement and avoid currencies which stay the same as the spreads on these won’t be nearly so lucrative plus, if you’re trading in the short-term, no activity means no profits.
Long-term forex traders
Long-term forex traders usually prefer to deal in the longer-term swing and position trades and, as such, they don’t need to worry so much about sticking to the most traded currency pairs. If you’re in it for the long haul, so to speak, you don’t need currency pairs to show activity right away because you’re not concerned with making the quick buck. Long-term forex trading involves what’s called ‘positional trading’.
Now, it would be misleading to suggest that long-term forex traders favour specific currency pairs. Long-term forex traders (who, it must be said, tend to be more experienced) will analyse trends and interest rates and economic policy, often for months or even years, to profit from a currency going up or down. This involves analysing graphs and bell-curves and, even still, there are no sure things.
Here’s a famous example of a positional trade paying off bigtime: In 1992, businessman George Soros heavily shorted (bet against) the British pound, based on scepticism over the country’s ability to maintain fixed exchange rates, at the time. He ended up making more than £1 billion on that one deal!
Please note, it’s not so much that certain currencies should be avoided, it’s more a case of avoiding obscure pairings because they can behave very unpredictably and, as such, it’s very easy to get burnt, financially.
We hope you’ve enjoyed our little guide on which currency pairs to favour and which to avoid. As you’ve no doubt learnt, although new forex traders almost always ask this question, there isn’t really a clear answer because, one, it depends on what kind (short-term? Long-term? Medium-term?) of trading you want to do and, two, the market is unpredictable it would be silly to make a marry/avoid list of currencies. However, as mentioned, it is usually a good idea to avoid strangely matched pairs. Stick with your native currency and another popular currency if you want the best short-term spreads and, if you wish to involve yourself with positional trading (which can be incredibly lucrative!) then your best bet is to see what other people are saying/doing (especially if you have limited experience), and see what positions are being offered by the top brokerage firm sites.
Thanks for reading and, as always, happy trading!