Forex Trading involves buying one currency in a currency pair, by selling the other. So if one is trading in EUR/USD, the trade may involve buying EUR by selling USD at the current market rate or vice-versa. Similarly buying EUR in EUR/GBP would require GBP to be sold.
Unlike options or stocks which have lots of companies that can be traded on, the forex market has got limited currency combinations which can be used to place the trades.
Despite this, often people wonder which currency pairs should be chosen for trading? Should it be USD based or should it be the one that is heavily volatile or should it be some other?
Lets look at few parameters which can be used to decide -
1. What is the pip spread involved - The biggest factor to be considered is the spread between the currencies. In layman's terms, Spread is a difference between the sell price and the ask price of forex currency pairs as given by the forex broker. In other words, it is a commission of the broker or agent through which the trades are made. The lower the spread, the better it is for the forex trader. The lowest spread I have seen is in EUR/USD, which has the average spread is 2 pips to 3 pips. Typically a spread of upto 5-6 pips is good enough to trade.
2. What is the liquidity? - The more the liquidity, that means the higher is the amount of money being traded on that currency pair. So, this eventually means that that particular currency pair moves a lot in a the trading sessions. Its better to trade on such from a day trading perspective as the trades don't need to be kept open for a longer time. I have seen that the GBP/USD is heavily liquidated. On average it moves about 100-150 pips everyday. This is followed by EUR/USD and USD/CHF.
3. How does the currency pair behaves? - Does it move technically or is it primarily fundamental driven? The one that is primarily fundamental driven doesn't has much regard for technical analysis. I have seen JPY (Yen) as one such currency which is heavily fundamental analysis driven.
So, these are the some factors that can be used in identifying the currency pairs to be traded on. Though these factors are not an exhaustive list, they can be used as minimum basic rules. The pip spread is one important criteria. The lower, the better it is. However the currency pair should also be sufficiently liquidated as this means that there will be significant pips movement during a trading day.
Unlike options or stocks which have lots of companies that can be traded on, the forex market has got limited currency combinations which can be used to place the trades.
Despite this, often people wonder which currency pairs should be chosen for trading? Should it be USD based or should it be the one that is heavily volatile or should it be some other?
Lets look at few parameters which can be used to decide -
1. What is the pip spread involved - The biggest factor to be considered is the spread between the currencies. In layman's terms, Spread is a difference between the sell price and the ask price of forex currency pairs as given by the forex broker. In other words, it is a commission of the broker or agent through which the trades are made. The lower the spread, the better it is for the forex trader. The lowest spread I have seen is in EUR/USD, which has the average spread is 2 pips to 3 pips. Typically a spread of upto 5-6 pips is good enough to trade.
2. What is the liquidity? - The more the liquidity, that means the higher is the amount of money being traded on that currency pair. So, this eventually means that that particular currency pair moves a lot in a the trading sessions. Its better to trade on such from a day trading perspective as the trades don't need to be kept open for a longer time. I have seen that the GBP/USD is heavily liquidated. On average it moves about 100-150 pips everyday. This is followed by EUR/USD and USD/CHF.
3. How does the currency pair behaves? - Does it move technically or is it primarily fundamental driven? The one that is primarily fundamental driven doesn't has much regard for technical analysis. I have seen JPY (Yen) as one such currency which is heavily fundamental analysis driven.
So, these are the some factors that can be used in identifying the currency pairs to be traded on. Though these factors are not an exhaustive list, they can be used as minimum basic rules. The pip spread is one important criteria. The lower, the better it is. However the currency pair should also be sufficiently liquidated as this means that there will be significant pips movement during a trading day.
