Which are the most traded currency pairs and why?
You’ve heard of fx trading and would like to know what exactly is traded there.
Perhaps you already know you’re trading by buying a currency and selling another simultaneously.
But which currencies? It makes sense to have all the big boys there: American dollar, Euro, Japanese Yen, but can you trade any pair of your choosing?
Why start with the most important currencies? We already know them don’t we?
As you’ve probably guessed, the more important the currency, the more likely it is to be traded.
This is why the American dollar (USD), and the Euro (EUR) are so heavily traded.
However, if you’re completely new to forex or if you don’t care much about other countries, you may not know some of the other important currencies.
You see… there are eight (8) important currencies in the spot forex market (the one you should be trading if you’re a normal retail speculator).
Which are these? Thought you would never ask.
USD – American Dollar
EUR – Euro
JPY – Japanese Yen
GBP – Great Britain Pound (sterling pound)
AUD – Australian Dollar
CHF – Swiss Franc
NZD – New Zealand Dollar
CAD – Canadian Dollar
Start learning the three-letter symbols so you don’t get confused with EUR/USD or GBP/JPY, since this is the way most pairs are quoted (you buy the first while selling the second).
The most traded currency pairs are those with two of the eight most important currencies in the pair.
Those of you especially gifted at math would yell:
“But we have 8 most important currencies, we can get 28 different pairs! Does this mean I have to learn how to trade 28 pairs?”
And the answer is no.
Once upon a time (about a year ago, as of this writing) I used to work with imports and exports statistics at the Central Bank of my country.
While working there, I learned that about 80% of the world’s trade is conducted in one currency.
Whether you’re buying oil from countries in the OPEC, exporting gold to China, or shipping Brazilian-grown coffee to your local Starbucks… You’re likely dealing in this one currency.
I bet I don’t have to tell you which currency we’re talking about (cough… USD… cough).
Even so, it might surprise you how dominant the USD is.
There are seven (7) major currency pairs, and they all have USD as one of the currencies:
EUR/USD – buy Euros, sell American Dollars
GBP/USD – buy sterling pounds, sell American Dollars
USD/JPY – buy American Dollars, sell Japanese Yens
USD/CAD – buy American Dollars, sell Canadian Dollars
AUD/USD – buy Australian Dollars, sell American Dollars
NZD/USD – buy New Zealand Dollars, sell American Dollars
USD/CHF – buy American Dollars, sell Swiss Francs
Why the specific pair ordering?
It’s easier to play with quotes higher than 1. This is why the stronger currency is often quoted first, however, this rule doesn't really apply.
For example, think of
EUR/USD 1.06, versus
Which one do you prefer?
It doesn't matter. As long as you know what you're talking about.
This is why there's a standard way to quote each pair.
Everyone would go nuts if you could just reverse quote everything.
Having a standard way of quoting most traded currency pairs (and others) makes it so no one gets confused:
When EUR/USD increases, you need more dollars for every euro (you’re winning if you bought the pair).
On the other hand, if USD/EUR increased, you would need more Euros for each dollar (you’re losing if you bought, oh, and you can still buy a dollar with less than a Euro).
I hope this gives you a clear picture of why we use EUR/USD instead of USD/EUR.
Having both is confusing, and unnecessary.
So forget about the latter. If you want to buy dollars while selling Euros, just sell the EUR/USD pair (the standard way to quote this pair).
See how clear that was?
But the most traded currency pairs are not the only traded pairs, we also have those called “minors”.
Crosses, also called minors, are currency pairs which do not have USD as one of the two. However, they have EUR, GBP, or JPY as one currency in the pair.
Crosses are composed of non-USD important currencies (the other 7 described at the beginning of the article).
These are just a few examples, of course.
There really isn’t much more to say here, as you can see, the only special thing about crosses is they don’t have USD as either the base or the quote currency.
These are well-traded, but their liquidity is understandably less than that of the major, most traded currency pairs.
Now, this sounds exciting, but I assure you it’s not as much.
In the next section you’ll see why trading these is more expensive (wider spread).
The exotics are those not included in the majors and minors.
Typically, an exotic pair has one of the most important currencies in one side of the pair, and a less transacted currency on the other side.
Some examples might be
USD/SEK, where SEK stands for Swedish Krona
USD/ZAR, where ZAR is the South African Rand
USD/SGD, where SGD is Singapore Dollar
Ok, so why does all of this matter?
Well, unlike in other markets, you only need to acquaint yourself with a few securities.
For example, instead of having thousands of potential stocks to pay attention to, you only need to focus on a few well-traded currency pairs.
This makes it easier to become an expert on their fundamentals (if you don’t make the mistake of trading based only on technical indicators) since it’s easier to follow the news and develop experience with the same pair.
Also, why the focus on the most traded currency pairs?
There are several reasons, but the first is liquidity.
Those pairs are composed of the most used currencies in world trade.
Hence, unlike selling a home in a dessert, you will find many, many, many buyers and sellers for these currencies (liquidity).
Man it's dry...
Bring me some liquid-ity
Since there’s so many people, companies, and institutions trading these currency pairs the spreads are lower than those of minor and especially exotic pairs.
Secondly, high liquidity makes it harder to manipulate the pair price.
If some whale decides to transact a few billion EUR/USD the market may not respond as much to it (liquidity varies throughout the week and time of the day, so this isn’t always true).
Now think of the same transaction in a single stock…. Yeah, you get the idea.
Hopefully this gives you an idea of why forex trading is so popular (the market is in the trillions with a huge chunk coming from speculators).
See you soon,
The Forex EconomistHome > Forex Trading Basics > Most Traded Currency Pairs
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