Risk Warning

Forex Trading on margin carries a high level of risk, and may not be suitable for all traders. The high degree of leverage can work against you as well as for you. Before deciding to trade forex you should carefully consider your trading objectives, level of experience, and risk appetite. It is possible that you could lose some or all of your initial capital and therefore you should not trade money that you cannot afford to lose. You should be aware of all the risks associated with forex trading, and seek advice from an independent financial advisor if you have any doubts. Having said that, anyone with a sound mind can trade Forex but he must be aware of the risks involved as highlighted above.

Thursday, January 15, 2009

Which Forex Currency Pairs to Trade

Since there are so many countries in the world, there will be many currencies pairs available but luckily the bulk of the Forex market involves only a handful of currency pairs and you only need to trade in these pairs and not bothered about the rest. This is surely much simpler than picking what stocks to trade.

By definition, the major currency pairs will involve the following major currencies - USD (US Dollar), EUR (Euro), JPY (Japanese Yen), GBP (Great Britain Pound), CHF (Swiss Frank), CAD (Canadian Dollar), AUD (Australian Dollar) and NZD (New Zealand Dollar). Out of the many combinations possible, the major dollar currency pairs are, in order of volume traded, the following. (The figure in brackets is the spread in pips used by Interbank FX, other brokers may vary but this is typical. This is the spread under normal trading conditions but during very volatile periods or just before major financial announcements, the spread will increase quite a bit so keep an eye on this before you execute your trade as it may upset your calculations.)

1. EUR/USD (2)
This is the most actively traded currency pair in the Forex market (27% market share) and thus it is the most liquid pair. This is the best pair for trading by newbies since it is generally well behaved and not very volatile compared with other pairs. It also has the lowest spread and some traders just trade this single pair for a living.

2. USD/JPY (3)
This is the second most actively traded currency pair (13% market share) after the EUR/USD. This pair can move quietly along a narrow range for some time and then move very quickly in either directions. This pair is popular with short-term traders for quick profit because of this trait.

3. GBP/USD (4)
The next most actively traded pair (12% market share). This generally has similar directional movement as the EUR/USD but it is more volatile and moves a bigger range than the EUR/USD.

4. USD/CHF (4)
This has only 4% market share but is the most volatile among the 4 major currency pairs and sometimes it even appears chaotic. Thus it is not recommended for newbies but good for those looking for excitement.

Thus the top 3 major pairs has more than 50% of the market share and just trading these 3 pairs is enough to keep you busy round the clock. If these are not enough you can look at some other pairs below when you are feeling bored.

The minor dollar currency pairs are those where the USD is pitted against the other major currencies, namely,

5. USD/CAD (5)
6. AUD/USD (5)
7. NZD/USD (5)

And finally, the cross currency pairs are those that do not involve the USD and you can have so many combinations but the more popular ones are the following.

8. EUR/JPY (5)
9. EUR/GBP (7)
10. EUR/CHF (7)
11. GBP/JPY (9)
12. GBP/CHF (12)

It is recommended that newbies start with trading the EUR/USD and hone their skills using this pair. You will be able to see similar patterns of price action repeating itself over a period of time and by concentrating on a single pair, you will improve your chances of success. Familiarity breeds profits, not contempt.

Ronald Kwok
http://cbpirate.com/s/cbp/ronaldkwok

Posted by at 5:00 PM
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5 comments:

  1. hi Ronald, just popping in to say hi! i have also just start forex trading and have a blog. in fact, i also have just written on this topic on which currency to trade: http://optionstrader.joymastery.com/2008/12/03/which-currency-pairs-to-trade/

    i am also tracking the development of trading courses but in Singapore context.

    hope to exchange pointers with you along the way =)

    ReplyDelete

  2. Hi jmot,
    thanks for viewing. I see that your blog is somewhat similar to mine. Many Singaporeans are conduting Forex courses here in Malaysia now. Just curious, how did you find my Blog? Cheers.

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  3. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

    Lucy

    http://forextradin-g.net

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