There are roughly 180 official currencies globally, but not all currencies are traded on the Forex market and some are more frequently traded than the others. Generally speaking, more than 95% of all daily transactions in the Forex market include the following currencies:
- US Dollar (USD)
- Euro (EUR)
- British Pound (GBP)
- Japanese Yen (JPY)
- Swiss Franc (CHF)
- Australian Dollar (AUD)
- New Zealand Dollar (NZD)
- Canadian Dollar (CAD)
The most liquid currencies are traded against the US Dollar because the greenback is the world’s leading reserve currency that accounts for 88% of currency transactions.
Currency pairs are generally split into three major categories:
- Major currency pairs
- Minor currency pairs also known as cross-currency pairs.
- Exotic currency pairs
For the purpose of this article, we’re only going to focus only on the most commonly traded pairs which are the major currency pairs. The majors are known to offer the best trading opportunities.
Major Currency Pairs
The major currency pairs consist of six currency pairs that are internationally the most frequently traded currencies. Because they are most traded currency pairs globally, a lot of traders are analyzing the charts of the majors for trading signals.
When trading major currency pairs you pay competitive spreads because of the tremendous amount of liquidity; thus you can trade them anytime during the day session. Your goal should always be to trade one of these currency pairs. Liquidity means less risk of big gaps and instant execution.
The major currency pairs are highly technical in nature which means you can profit by simply studying a price chart.
There are different economic drivers for different currency pairs. For example, if you like to trade commodities like oil, you might like currency pairs which are linked to oil trading like the Canadian Dollar (CAD). Because the Canadian economy relies on oil exports the USD/CAD will be impacted and driven by the changes in Oil prices.
To understand what moves the currency market, you need to know that it depends on the specific pair you want to trade. However, one thing for sure is that Central banks are important and big influencers to currency movements and more often than not they are the main driver for currency exchange rates.
Commonly Traded Currency Pairs
The EUR/USD is considered to be one of the best currencies to trade. Approximately 28% of all Forex transactions involve EUR/USD. The EUR/USD exchange rate is most influenced by the two most powerful central banks in the world: the Fed and the ECB.
The US Federal Reserve has a major influence over currency pairs involving the US dollar. Make sure you know when the Fed’s meetings occur because when the Fed changes its interest rate policy all US Dollar crosses tend to experience major movements. You will find these in studying economic calendars so you can plan your entry and exit from the trade.
The ECB is similar to the Fed, and the regular meetings are a major global event for currency trading. For example, when the ECB started easing monetary policy in 2014 the EUR/USD exchange rate fell in the subsequent years.
So, any changes in the central bank’s monetary policy can be a significant driver of currency exchange rates. The time of the day also plays a role and influences the EUR/USD price behavior.
Generally, the most active trading hours for EUR/USD is between the London open at 8:00 GMT and the US close around 22:00 GMT. Also the New York opening session at 1:00 GMT can provide us with great trading opportunities.
We want to avoid trading during the Asia session when there is less volatility.
The USD/JPY is the second most traded currency pairs and represents 19% of all Forex transactions. The Bank of Japan (BOJ) is one of the biggest drivers for USD/JPY exchange rate. Unlike other currencies, the Japanese Yen crosses presents good trading opportunities, even during the Asia session because it is during this time that the BOJ is usually trading in the market.
The Asia session starts at 1:00 GMT and closes at 10:00 GMT.
The third most traded currency pair is the GBP/USD which accounts for 9% of all daily Fx transactions. The Bank of England (BOE) is responsible for maintaining a fair GBP/USD exchange rate. Normally, the London open tends to have the greatest impact and can set the tone for the rest of the day when it comes to GBP/USD direction.
If you were to choose to trade only three currencies, I recommend developing a trading plan that sticks with the three major currency pairs: EUR/USD, USD/JPY and GBP/USD. Avoid trading minor currency pairs and obscure pairs because they will be less liquid and more prone to some erratic behavior, thus less technical and higher risk of trading.
Trade the currencies that you’re able to monitor during the day and understand the central bank’s monetary policy. Remember, there are many traders who make a living from just trading one currency pair and you can do this as well. You only need to master one currency pair and don’t need to worry about what’s happening on the rest.