A currency pair in forex trading refers to a quotation of two different currencies, specifically, it is the amount that you would pay in one currency for a unit of the other currency. Therefore, when one currency’s value within the pair changes, it will invariably impact the value of the overall pair on the market.
Moreover, any change in a currency’s value is usually measured relative to the other currency in the pair. For example, if the currency pair of interest is the USD/CAD and it is quoted at 1:13 on one day but 1:15 the next day, it means that the USD has appreciated in value relative to the CAD.
Novice traders are often advised to start off by trading some of the safe haven currencies, as they are said to be more stable on the financial markets. The USD/EUR and other popular forex pairs, such as the USD/JPY, GBP/USD and the USD/CHF, all consist of the USD, which is proof of the role and importance of the USD on the forex market. Moreover, it also speaks to how active the American economy is and why it is regarded as the reserve currency across the globe.
What to consider when selecting currency pairs
When one is deciding which currency pairs to trade, there are a few key aspects to consider, which ultimately impact the performance of the currencies on the financial markets. These include, but are not limited to:
Volatility. Volatile currencies are known to be prone to abrupt changes, therefore, when selecting currency pairs to trade, it is advised to choose currencies that are not volatile. To determine this, you could refer to past data on the performance of those currencies on the financial markets, in order to gauge how they have been performing in recent times.
Liquidity. Liquidity in forex trading refers to a currency pair’s ability to be bought and sold without creating a major impact on its exchange rate. Therefore, the more liquid currency pairs are preferred because it is a key factor in the profit-making aspect of trading. Having greater liquidity allows for easier transactions and makes pricing more competitive.
Exchange rates. Perhaps one of the most obvious factors to consider when selecting currency pairs to trade is the exchange rate of each. It is also important to bear in mind the monetary and financial policies that govern the exchange rates of those currencies. The exchange rates have a direct impact of the trading profit that can be made from the currencies, which is why it is important to stay in the know and have an understanding of where the currencies stand in that regard.
Political stability. Another important aspect to consider is the political stability, or instability, of the countries and the economies at hand. This not only impacts investor confidence, but it also affects the strength of the currencies on the markets. Currencies whose economies face constant turbulences are generally weaker than most, which means that traders are often cautious when dealing with them and will most likely not invest in unstable countries and currencies.
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