For beginners in forex trading, choosing the best currency pairs is important. The possibility of making common mistakes is easier for beginners when trading forex. Under such circumstances, one should carefully pick the best currency pairs for trading forex.
In this article, we will outline the top three best currency pairs to trade for beginners. We also give you details about how each of the three best currency pairs behaves. By the end of this article, a beginner to forex trading should be able to easily start trading.
With careful risk management and applying the concepts, these three best currency pairs in forex are a must for beginners.
Bear in mind that we focus on short term or intraday trading strategies. As beginners, it is good to be disciplined. Therefore, the overall rule of thumb is to take only one trade per day, per instrument.
Therefore, depending on the trading opportunities that may come your way, at best you should be able to make three trades per day.
This will keep you from overtrading. It will help you to better understand how each of these best currency pairs can be used to make money trading forex.
Before we go into the details, let’s take a look at some of the characteristics that make up the best currency pairs to trade for beginners.
What factors should you consider when choosing the best currency pairs for beginners?
As a beginner to trading, there are obviously quite some challenges that you will be facing.
These can range from now knowing how to buy and sell, to not knowing how many contract sizes or lots that you should be using. This article assumes that the beginner to forex trading is already familiar with these basics.
But once you are past this, the next question is what kind of currency pairs should you choose?
For a beginner, any forex currency pair may look the same. Take, for example, the EURUSD and the NZDUSD.
Both these currency pairs have the USD as the quote currency. Both are fairly liquid enough and you can trade either of these two currency pairs using the same technical trading strategies.
However, once you begin trading these two currency pairs, you may find subtle differences.
For example, did you know that the NZDUSD is more volatile than the EURUSD? Or did you know that the kiwi dollar is more active during the early Asian session?
Subtle characters such as this can quickly see you taking on more risk and at points, unable to manage the trades.
What makes the best currency pairs for beginners ideal under such circumstances?
Here are five things to consider when choosing the best currency pairs for beginners.
Liquidity
Liquidity is a measure of how easily you can enter and exit a trade (from a day trading context).
When liquidity is high, you are able to trade on currency pairs that have lower spreads. The spread, which is the difference between the bid and ask price is the fee that you pay to your broker. This can be on top of any commissions that your forex broker charges.
Another benefit of trading with currency pairs that have high liquidity is that the variable spreads remain tight for almost all the time. This helps your trade from being prematurely stopped out.
Volatility
Volatility measures the amount by which a currency pair can deviate from its average or mean price. Although the forex markets consist of different currency pairs, each of them exhibits different levels of volatility.
Therefore, you should pay attention to this. For example, one currency pair may move just around 20 pips on average. But there are also currency pairs that can move on average 50 pips, if not more.
Beginners in forex trading should understand that volatility can wreak havoc with your trading strategies. Therefore, you can pick a trading strategy that may work for one currency pair, but if it is not fine tuned for another currency pair, it will lead to losses.
Fundamentals
Following the fundamental analysis for a currency pair is also important. You cannot rely only on technical analysis. Fundamental analysis can make the markets whipsaw. But with different currencies in the forex market, the fundamental news is released at different times.
Ideally, you should pick a currency pair that is closer to your trading times. For example, if you are in Asia, then trading currency pairs such as USDJPY, AUDUSD, NZDUSD makes more sense, rather than trading USDNOK or other currencies outside of your location.
In doing so, you can monitor your trades and also prepare for them beforehand. In the unlikely event that the fundamental news reverses direction of your currency pair, you can easily exit the trade.
Technical trading strategies
You can basically pick out any technical trading strategy and apply it to the different currencies in the forex market. But as we mentioned, if you are day trading, factors such as volatility and liquidity play an important role.
You should therefore choose a technical strategy is that broader, such as a trend following trading strategy. Following this, you should then fine tune your trading strategy to suit the currency pair that you are trading.
This will enable you to fine tune your technical trading strategy that is more aligned with the characteristics of the currency pair you are trading.
In doing so, beginners are able to cut back on undue losses that may occur if you do not keep the above rules in mind.
Now that we know some of the factors that traders should keep in mind when trading forex, let’s look into some of the best forex currency pairs for beginners.
The top three best forex currency pairs for traders
The selection of the three best currency pairs to trade for beginners is outlined below. We take a more generic approach. Of course, you can look into the characteristics of these best forex currency pairs and find something with similar attributes.
EURUSD
We will start off with the most popular currency pair, the EURUSD. Here, the euro is the base currency, and the US dollar is the quote currency.
The EURUSD is also the most liquid currency pair in the world. This is because, it comprises of two of the most widely circulated currencies, namely the euro and the USD.
As a result of this, the spreads on the EURUSD are usually close to one pip or at times even lower (when you trade with a variable spread broker). This attribute gives you the confidence that no matter at what time you trade, there is sufficient liquidity in the EURUSD market.
On the fundamental aspect, the EURUSD is governed by the economic news releases from the Eurozone and the United States. Therefore, volatility tends to pick up toward the start of the European trading session. It increases even more during the overlap of the European and the US markets trading session.
This currency pair tends to exhibit reasonably strong bouts of trends. Therefore, both day traders and swing traders can easily apply their trading strategies to the EURUSD.
GBPUSD
The GBPUSD is the currency pair between the British pound sterling and the US dollar. This is one of the oldest currency pairs, dating even before the introduction of the euro common currency.
The GBPUSD’s behavior follows that of the EURUSD. However, ever since Brexit, things have changed a bit. The UK is no longer tied to the Euro area economic region. Hence, the movement in this currency pair can be different, focusing on the fundamentals between the United States and the United Kingdom.
The volatility and liquidity in this currency pair ranks number two. However, more activity can be seen during the European trading session. You an also find activity in the GBPUSD picking up during the overlap of the European and the US trading sessions.
The GBP tends to exhibit strong moves, especially during the European business hours. Lots of economic data comes out and the price movements reflect traders adjusting to discounting the economic data. The GBPUSD also tends to get more volatile during the New York trading session.
USDJPY
The USDJPY currency pair is one of the most liquid with it comes to the Asian markets. The Japanese yen continues to remain one of the most popular currencies in the Asian region.
Another unique aspect of the USDJPY is that it is a safe haven instrument. Thus, during times of uncertainty, the USDJPY tends to depreciate, as the Japanese yen strengthens.
One can find the risk on or the risk off sentiment in the market, by simply looking at the daily trends in this currency pair. The USDJPY is not that sensitive to data from Japan. The exception here being the monetary policy from the Bank of Japan.
For the most part, the USDJPY follows the global trends and especially that of the U.S. equity markets. Due to this unique nature of USDJPY, it also moves in line with other safe haven instruments such as USDCHF and Gold CFD.
The USDJPY is quite sensitive to the U.S. monetary policy updates. Investors tend to bid up prices higher in the USDJPY when they see that US interest rates will rise higher. To the downside, officials at the Bank of Japan tend to talk up the yen especially when it falls closer to the price level of 100.
This currency pair, unlike the EURUSD and the GBPUSD is quoted in three decimals. Traders should bear this in mind when trading the USDJPY.
Tips to trade the best forex currency pairs
So far, we have learned the top three currency pairs to trade for beginners. Newbies can start trading with these currency pairs straight away as long as they focus on the important aspects of analyzing these currencies.
Still, quite a few traders tend to continue making losses. Here are some tips to help you minimize your losses if you are a beginner to trading forex.
Take small positions
Beginners should start off by trading smallest lot sizes available. This will ensure that your risks are kept to the minimum. Obviously, one should trade on a demo forex trading account first to gain practice.
Even while trading on a demo forex account, traders should resist the urge of trading with large lot sizes. Paying attention to the lot size and risk management from the beginning will go a long way in your success as a forex trader.
Inter-market relationships
Although you may trade different currency pairs, the fact is that they are all interrelated. For example, the EURUSD and GBPUSD tend to move in the same direction for the most part. This is because both of these currency pairs have the US dollar as the quote currency.
On the contrary, a currency pair such as USDJPY tends to be converse. When the EURUSD and the GBPUSD rise, the USDJPY tends to fall. The exception here is that when you see the USDJPY strengthening, you can expect to see the markets trading in a risk off sentiment.
This can lead to either the euro and the British pound both rising in tandem or falling depending on how strong the USD behaved.
USD and the JPY relationship
Traders should also note that both the US dollar and the Japanese yen are safe haven currencies. During global crisis, the yen outperforms the USD. On the other hand, when there is uncertainty in the domestic US markets, the USD tends to appreciate.
This can happen at regular intervals and therefore traders should keep a close watch on the economic outlook for the United States.
Practice will make you perfect
For someone who is trading forex for the first time, the markets will no doubt be intimidating. However, you should not let that affect you. Practicing using a demo trading account is the best way to get ahead in the forex markets.
One should also make an attempt to understand the intermarket relationship at play. This means that traders should also give equal importance to the fundamental factors at play as well.
The above three best currency pairs to trade for beginners are aimed to help you to get settled into trading the forex markets. Once you have mastered the art of analyzing and trading these currency pairs, you can quickly move on to the other markets.