In the forex market, there are as many currency pairs as there are currencies in the world, and all pairs can be exchanged so long as they are quoted by a broker. However, not all pairs are suitable for “trading for profit” based on trading strategies that seek to profit from price movements resulting from inefficiencies in supply and demand.
Forex Currency Pairs
Currency pairs that are categorized as “major currencies” include the EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, and USD/CAD. These currency pairs are the most liquid and trade the highest volume on a daily basis. They also have the tightest spreads, although the spreads may vary from broker to broker, and the type and size of the account. These pairs are very well suited to trading for profit.
Currency pairs that are not associated with the US Dollar are referred to as “minor currencies,” or “crosses.” These pairs have slightly wider spreads, are not as liquid as the majors, but they are sufficiently liquid markets nonetheless. The crosses that trade the most volume are amongst currency pairs in which the individual currencies are also majors. Some examples of crosses include the EUR/GBP, GBP/JPY, and EUR/CHF to name a few. Most of these pairs are also well suited for trading.
The third category is referred to as the “exotic currencies.” These currency pairs include currencies of emerging markets, are not as liquid, and the spreads are much wider. An example of an exotic currency pair is the USD/SGD (US Dollar/Singapore Dollar).
Currency Pair Attributes to Consider
When trading the forex market, the trading strategy that is employed will determine what currency pairs can be successfully utilized to generate profit. As a general rule, all strategies require that the currency pairs have high liquidity, reasonable spreads, and decent execution buy the broker. A short-term intraday strategy that seeks small profits will require the tightest spreads and fastest executions in order to avoid excess slippage. Too much slippage on a short-term strategy may result in losses, even if the strategy shows promise in backtests. By contrast, a strategy that is longer term in nature in which slippage in not as critical, currency pairs that have wider spread may be suitable.
Another important element to consider is the amount of profit (or loss) resulting from a one pip price movement. For example, the US dollar(USD) per pip for the GBPUSD and the EURUSD is fixed at $10. This means that for every single pip movement in price will result in $10 of profit (or loss) per contract. Currency pairs in which the USD is the base currency (listed first in the pair: i.e. USDJPY and USDCHF) will vary in US dollar per pip depending on the price. The currency pairs with higher profit per pip movement will yield more profit/loss and are better suited for trading. That is not to say that currency pairs with lower profit per pip movement should not be used, however, profit expectations should be adjusted accordingly. Some trading strategies are not flexible enough to use currency pairs with a lower yielding US dollar per pip metric.