The foundation of forex trading is the differences in exchange rates of currencies and making profits as a new trader in the dynamic currency market is not an easy endeavour. Because the concept of currency conversion rates can be confusing and anticipating the changes in the conversion rates and value of currencies requires a good amount of knowledge and skills. It is needless to mention the fact that your trading capital will be at risk as the exchange rates are constantly fluctuating and the use of leverage for opening larger-sized trades amplifies the risk.
So, you need to be careful with leverage and if possible, use a margin calculator to determine the minimum account balance to be maintained for the leveraged trades. This is what we refer to as margin requirement and it is a key aspect to consider as a trader. But before getting started with trading, you need to understand the concept of currency pairs and choose the best ones for yourself.
If you are a beginner entering the forex market, this blog can be an insightful read on how to choose the most suitable currency pair to trade as a beginner.
Basics Of Currency Pairs
Let’s start by understanding the basics of forex currency pairs. The forex market is quite different from other financial markets as the asset class is currencies itself. To make trading easier, 2 different currencies are paired together and the exchange rate is denoted as the price of a currency pair. A currency pair will have a base currency which is the one being bought or sold and the value of this currency will be stated against another currency which is known as quote currency. An example is the popular EUR/USD pair with the Euro as the base currency and its value is quoted against the US Dollar.
There are a lot of currency pairs that you can trade in the forex market but each pair is different when it comes to trading volume and volatility. The trading volume of a currency pair decides the liquidity of the pair and the ease with which you can enter and exit trade positions at desired prices. Volatility is the extent to which the price of the currency pair can move in a specified period of time and the more volatile a pair is, the harder and riskier it gets to trade with the pair as a beginner. To navigate these intricacies effectively, consider seeking expert FX advisory services to optimize your trading strategies and mitigate risks.
Another thing to know about currency pairs is that prices of different pairs can rise or fall together as they move in the same or opposite direction. This is what we refer to as correlated pairs and the positively correlated pairs will move together and if the correlation is negative, they will move opposite to one another. So, you need to study the correlation between currency pairs if you plan to trade with multiple pairs. But beginners are always advised to focus on one pair at first.
One tool you can use while trading with different currency pairs is a currency calculator that applies real-time exchange rates for currency conversion. This allows you to trade with ease even when you have a different base currency in your trading account.
Lastly, the currency pairs in the forex market are classified as major, minor and exotic pairs. Let’s have a look at the characteristics of different types of currency pairs and how they will suit a beginner.
Major Currency Pairs
Major pairs are the most traded currency pairs in the forex market and they are the best starting point for a beginner due to their high liquidity and stable nature. A major pair will always have the US Dollar as the base or quote currency along with other major currencies like the Euro, Japanese Yen, Great British Pound, Canadian Dollar, Australian Dollar, New Zealand Dollar and Swiss Franc. The spreads of major pairs are the tightest due to the high trading volume and this also reduces the risk, making them an ideal match for beginners.
Minor or Cross Currency Pairs
Minor or cross-currency pairs stand second when it comes to trading volume and liquidity but they are a little more volatile than major pairs. These pairs are also formed with major currencies but exclude USD. A minor pair will always include at least one of the top 3 major currencies: Euro, Japanese Yen, and British Pound Sterling. The spreads of minor pairs are higher than major pairs but they also give a lot of trading opportunities.
Exotic Currency Pairs
Exotic pairs include one major currency paired with a currency from an emerging or developing economy. This exotic combination is preferred by those who have a high-risk appetite. Because the volatility is high and liquidity is low. Because of this, the spreads are higher and trading is harder. They are not very suitable for a beginner with no experience.
Regardless of the currency a trader wishes to trade, the end goal is to make profits and to keep track of profits, it is advised to use a profit calculator, which calculates all the earnings or losses you’ve made in a trading day in the currency of your choice. Then, you can write your P&L in a journal along with the reasons for learning purposes.
Now, I will be listing the top pairs that you can trade with as a beginner.
- EUR/USD – This is the most traded major pair and it is nicknamed ‘fiber’ in the forex market. The Euro paired with the US Dollar is a safe bet for a number of reasons. The EUR/USD pair is preferred for the reasonable volatility and this is the most liquid pair you can find and it has the lowest spreads as well.
- USD/JPY – The US Dollar paired with Japanese Yen is another ideal pair for beginners with tight spreads. The nickname for this major pair is Gopher as it remains stable with trends that last for a longer period, offering a lot of profitable trading opportunities.
- GBP/USD – The cable pair is positively correlated to the EUR/USD pair but it is more volatile and will be suitable for those beginners who are comfortable with a little more risk. The British Pound quoted against USD presents a lot of trading opportunities that you can capture through a detailed market analysis.
- USD/CAD – The US Dollar paired with the Canadian Dollar is nicknamed as Loonie and it is yet another suitable pair for beginners. The Canadian Dollar’s value is always influenced by the oil prices in Canada as you can see the pair price rising when a fall in oil prices leads to weakness in CAD.
- USD/CHF – The Swiss Franc pair is negatively correlated with EUR/USD and GBP/USD. This pair is more predictable in comparison to other major pairs but trading with the pair can be challenging if you only look at technical analysis. Beginners can trade with the pair by considering the economic factors.
- GBP/JPY – This popular cross pair, nicknamed the ‘Beast’ and beginners who are ready to take some risk can add the GBP/JPY pair to their watch list.
- EUR/GBP – This is one of the least volatile currency pairs in the list and will be suitable for new traders who are risk-averse.
Final Words
In the end, being a beginner in the forex market will always be a challenging process irrespective of the currency pair you choose but when you pick a suitable pair for trading, the risk will be lower and your chances of success will be higher.
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