Currency trading always involves forex pairs. The two
currencies involved in your trade is the pair. If you are
trading US dollars for Swiss francs, for example, the
currency pair is USD/CHF.|
Trading is limited in most cases to the currencies of the larger financial powers, though theoretically you could trade any two currencies of the world. This does not mean necessarily the most powerful politically or the biggest countries. Because of the global importance of the Swiss banks, Switzerland for example a small country, is a major player in the financial markets.
There are 6 major forex pairs which between them account for 90% of the funds traded on the forex markets. These are:
- EUR/USD: the euro and US dollar.
- the British pound and US dollar, nicknamed Cable because it used to be synchronized on both sides of the Atlantic by a cable running under the ocean: GBP/USD.
- JPY/USD: the Japanese yen and the US dollar.
- USD/CHF: the US dollar and Swiss franc.
- USD/AUD: the US dollar and the Australian dollar.
- USD/CAD: the US dollar and Canadian dollar.
Some traders get involved in other combinations of these major currencies or pairs that include other currencies such as the New Zealand dollar. But in the beginning it is best to stick with the majors.
The US dollar is the most significant single currency and is involved in 85% of trades according to a 2007 study. The euro is second at 37%. Next come the yen, pound, Swiss franc, AUD and CAD in that order. If you are wondering why these add up to more than 100%, it is because there are always two currencies in every trade.
For a Beginner, What Is The Best Currency Pair?
Because there is a lot of information about the EUR/USD pair and the high liquidity results in a smaller spread, most experts advise starting out in forex with this pair so your costs will be lower.
Most newbies avoid some of the other currencies because they have particular characteristics that require special knowledge. For example the value of the Canadian dollar is strongly influenced by the price of oil because Canada is an oil exporter. Because Japan is a large consumer and importer of oil the Japanese yen can also be affected by the price of oil in the opposite direction.
You will not want to get involved in a lot of different currencies when you are starting out. The best thing to do is probably to take the EUR/USD market and stay with that for the first few months at least. GBP/USD would be the second choice of the major forex pairs for most new traders.
Author, T. O'Reilly has studied day trading the currency market for the past two years and is earning $363 every day. Find out how you can do the same from the comfort of home using forex pairs.