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Have you been struggling about which currency pairs to trade? You are not alone, it's common with beginner forex traders.
In this post we talk about the major currency pairs and how they are influenced by central bank policies and commodity prices. And again, how to trade one currency pair consistently and profitably.
Forex trading involves the exchange of currency pairs, and there are major pairs that are widely traded by professionals due to their liquidity and popularity.
Let's also discuss each major forex pair and reasons why a trader may not be trading all of them.
Major Forex Currency Pairs:
1. EUR/USD (Euro/US Dollar)
This pair represents the two largest economies in the world, the Eurozone and the United States. It's the most traded pair in the forex market, known for it's liquidity and tight spreads. Many traders focus on this pair due to its stability and predictability.
2. USD/JPY (US Dollar/Japanese Yen)
The USD/JPY pair is heavily influenced by the monetary policies of the Federal Reserve and the Bank of Japan. It's popular among traders due to its high liquidity and volatility during Asian trading session.
However, some traders may avoid it during periods of low volatility or when there are significant geopolitical tensions in the region.
3. GBP/USD (British Pound/US Dollar)
This pair is also known as "Cable", it's influenced by economic data releases from both the UK and the US. It's known for its wide day and swing trading, and can be volatile, especially during Brexit-related news events.
Traders may avoid it during times of uncertainty, such as political turmoil or major economic announcements.
4. AUD/USD (Australian Dollar/US Dollar)
The AUD/USD pair is heavily influenced by commodity prices, particularly gold and iron ore, as Australia is a major exporter of these commodities.
It's also sensitive to Chinese economic data due to Australia's close trade ties with China. Traders may avoid it during periods of global risk aversion or when commodity prices are highly volatile.
5. USD/CHF (US Dollar/Swiss Franc)
The USD/CHF pair is known as the "Swissie" and is often considered a safe-haven currency pairs. It's influenced by global risk sentiment, as well as the monetary policies of the Federal Reserve and the Swiss National Bank.
Remember we've mentioned 2 currency pairs nicknamed: GBP/USD as "Cable" and USD/CHF as "Swissie".
Why I want you to take note of this is because, high class professionals, and investors use those Currency Pairs's nicknames most times.
So if you are a newbie you may get a bit confused, I think it is important you put it in your note.
Therefore, traders may also avoid USD/CHF during times of extreme volatility or when there are interventions by the Swiss Franc.
6. USD/CAD (US Dollar/Canadian Dollar)
The USD/CAD pair is heavily influenced by oil prices, as Canada is a major oil exporter. It's also sensitive to economic data releases from both the US and Canada.
Traders may avoid it during times of high volatility in the oil market or when there are significant changes in monetary policy from the Bank of Canada or the Federal Reserve.
7. NZD/USD (New Zealand Dollar/US Dollar)
The NZD/USD pair is influenced by commodity prices, particularly dairy products, as New Zealand is a major exporter of dairy.
It's also sensitive to economic data from New Zealand and global risk sentiment. Traders may avoid it during periods of heightened volatility or when there are significant shifts in global commodity prices.
Recommended Forex Pairs By Professionals
Although, traders may not trade all major forex pairs due to various reasons such as personal preference, trading strategy, risk tolerance, or market conditions.
The personal preference applies to me directly. I prefer to place the major forex pairs in my watchlist, although I still filter out the pairs from the Asian zone.
The reason why I do this is because their setups mainly present during Asian trading session. I do not place trades during "Dharma" period.
The major currency pairs always in my watchlist are:
- EUR/USD
- GBP/USD
- USD/JPY
- EUR/CAD
- USD/CHF
Most times when I am done with my technical analysis I pick the most clearer setup among them. That's what I do. For example, In a particular week in February 2024.
When I was done with my analysis, I discovered a setup on Monday of the second week of that month, both GBP/USD and EUR/USD. But GBP/USD's setup was clearer, I took the trade and made 50 pips that day.
Then on Tuesday I came back to my chart, after my analysis I saw a continuation setup on both pairs again. This time EUR/USD was clearer, and I took it and made 30 pips.
What I am trying to say is that I don't trade all the major pairs in my watchlist at the same time. I rather pick a setup on any of the major pairs that presents more clearly.
Thus, some traders may focus on a few pairs that they are most familiar with or those that align with their trading style and expertise.
Additionally, trading all major pairs simultaneously may require significant capital and resources, which not all traders may have.
Now the founder of BTMM trading strategy, a mentor during his live training session Steve Mauro said something very interesting.
A student asked him which forex currency pair(s) he would recommend for a beginner forex trader? He said that he recommends GBP/USD when you are starting out.
Again, Jeffrey Benson focused on GBP/USD and USD/JPY when he started out, but later he maintained GBP/USD. Only GBP/USD made him a multimillionaire. The most interesting thing is that he maintained this pair for very long time.
Jeffrey Benson aways advices his students to hold on one thing. Study the behaviors of each pair such as the most common candlestick reversal patterns and price patterns.
For example, which candlestick patterns always form on a particular pair during price reversal or continuation? Is it hammer, engulfing patterns, or cord of wood patterns etc?
As you keep learning, practicing and gaining more experience, you will start seeing those behaviors playing out clearly.
Therefore, it is essential for traders to carefully select the pairs that best suit their trading goals and risk appetite.
Trading One Currency Pair Consistently and Profitably
Understanding the Fundamentals
To trade only one currency pair like AUD/USD consistently and profitably, understanding the fundamentals driving these currencies is crucial.
Monitoring economic indicators from both Australia and China, such as Gross Domestic Products (GDP) growth, trade balances, commodity prices, and investment flows, provide insight into potential currency movements.
You may ask why not AUD/CNY instead of AUD/USD. Yes, It is because Australia economic boost comes mostly from China.
Remember you can apply the same concept to other currency pairs. You may choose to apply it to GBP/USD, EUR/USD or USD/JPY.
You can begin to ask yourself. Which country has the highest or close trade ties with Great Britain, that helps boosts its economy? That's how you monitor Great Britain's economy. The same thing applies to Euro zone, and also USA.
Technical Analysis
In addition to fundamentals, technical analysis is essential. This involves studying price charts and using indicators like moving averages, Relative Strength Index (RSI), and Bollinger Bands to identify trends and potential entry and exit points.
Secondly, in technical analysis we talk about the uptrend, the downtrend and the range bound market.
Risk Management
Effective risk management is key to consistent profitability. This includes setting stop-loss orders to limit potential losses, diversifying trades to avoid overexposure to a single currency pair, and maintaining a disciplined approach to position sizing.
Another key important practice is to avoid over leveraging of your trading account, thereby protecting your equity.
Keeping Abreast of News and Events
Staying updated on geopolitical developments, trade policies, and economic data releases is vital.
For instance, announcements related to trade agreements between China and Australia, or changes in China's economic policies, can significantly impact the AUD/USD pairs.
Long-term vs. Short-term Strategies
Traders can adopt long-term strategies based on fundamental analysis, taking positions that reflect expected economic trends. That means you may choose to become a position trader.
Alternatively, short-term strategies might focus on technical analysis and capitalizing on market volatility and short-term price movements. That is where your trading style comes in.
You may become a scalper, a day trader, or swing trader, whichever way that suits your lifestyle.
By combining a deep understanding of the economic relationship between China and Australia with robust technical analysis and disciplined risk management, traders can navigate the complexities of the forex market and achieve consistent, profitable results in trading currency pairs like AUD/USD.
Commodities and Currency Pairs: The China-Australia Example
1. China as a Market for Australia's Commodities
China is a major importer of Australian commodities, particularly iron ore and coal. When China's economy is growing, it's demand for these raw materials increases.
That means when China's economy grows, Australia's economy grows.
This drives up the prices of commodities, leading to higher export revenues for Australia.
Consequently, the Australian dollar (AUD) appreciates against other currencies, including the US dollar (USD), as foreign buyers convert their currencies to AUD to pay for these commodities.
2. China as a Market for More Complex Australia Goods and Services
Beyond raw materials, China also imports more sophisticated Australian goods and services, such as education, tourism, and manufactured goods.
An increase in demand for these sectors strengthens the economic ties between the two countries and supports the Australian dollar.
For example, a surge in Chinese students studying in Australia or an influx of Chinese tourists boosts Australia's service exports, which can positively impact the AUD.
3. China as a Competitor
China is also a global competitor in various industries. When China increases its production of commodities or complex goods, it can lead to lower global prices due to higher supply.
If China produces more of a commodity that Australia exports, thereby weakening the AUD. For instance, if China ramps up its domestic production of steel, the demand for Australian iron ore might decrease, putting downward pressure on the AUD.
4. China as an Investor
China's investments in Australia have significant implications for the AUD.
When Chinese companies or the Chinese government invest in Australian infrastructure, real estate, or businesses, they often need to convert large amounts of Chinese yuan (CNY) to AUD.
This influx of investment capital can lead to an appreciation of the AUD.
Moreover, sustained investment reflects confidence in Australia's economic stability, further supporting the currency.
5. China as a Destination for Australian Investment
Conversely, Australia companies investing in China can affect currency flows.
If Australia firms invest heavily in Chinese projects, they will need to exchange AUD for CNY, which can lead to a depreciation of the AUD if the capital outflows are significant.
However, successful investments that generate substantial returns can eventually strengthen the AUD when profits are repatriated.
Conclusion:
We've talked about the major currency pairs and how they are influenced by economic data releases. We've talked about how some are influenced by commodity prices.
We've used China-Australia Example to discuss how the health of an economy is determined. And also determining one currency pair to trade consistently.
Over to you. Would you like to trade multiple currency pairs or one currency pair? Let us know in the comment box below.
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