As many countries there are that have their own currency, there are currency pairs to trade. This does not mean you should start off studying the movements of the Guatemalan Quetzal. New traders need to stick to those currencies whose indicators and movements have been well documented.
The three major currency pairs are the EUR/USD, GBP/USD and USD/JPY. If you didn’t already notice, the US dollar is listed in each one. That’s because this it the most traded currency in the market, and the one that has been studied at length.
There are three very good reasons why you should stick with these three currency pairs:
• All of them are well established currency pairs that are traded widely. This type of liquidity guarantees that you are going to profit from price changes.
• They all have the US dollar, which means that the most amount of activity will be during the New York trading hours. This adds to the liquidity as this is typically when the highest amount of Forex trading is taking place.
• Since they are so popular, a new trader is going to find a wealth of Forex trading systems online that can help them in trading these pairs successfully.
Which Ones Should You Avoid?
Any currency that is considered to be exotic or uncommon should be avoided by new traders. In some instances the financial state of the country is too unstable to be able to read the charts properly. For others, there just is not enough information available to you. A new trader needs to use as many resources as possible before placing a trade. Unless you have some first hand knowledge of Guatemala and its future financial state, you should stay far away from trading the uncommon currencies.
Focus your attention instead on the:
• Euro (EUR)
• US Dollar (USD)
• British Pound (GBP)
• Swiss Franc (CHF)
• Japanese Yen (JPY)
• Australian Dollar (AUD)
• Canadian Dollar (CAD)
Pick one of these currencies, pair it with the USD and then begin to study how that combination works. This is the best way for a new trader to learn how to formulate strategies by using a strong currency pair that has a lot of information available.
A new trader is advised to stay away from currency pairs that have a wide spread. This is the difference between the bid and ask prices. Those with high spreads tend to be more volatile, with long periods when the price will spike. This type of movement is harder for a new trader to manage with success.
The spread should be easily read on the trading platform, but if not you simply need to subtract the bid price from the ask price.
Too Many Pairs
Traders should start off by trading in one pair only and becoming an expert in it before moving on to another. It is a good idea to have at least two pairs to look at when actively trading in case that one is not working with your strategy at the time, but that comes later, for now just pick one and learn it well.
It is my opinion that this is the absolute best place for a new trader to start. These two currencies historically have the lowest spread in the market, making it one of the least volatile. It also responds properly in respect to all of the rules and indicators that you have been learning about. Consider this a safe trade to learn how to strategize with less risk to your Forex account balance.
The vast majority of weekly and monthly reports you study are focused on at least one of these currencies. Plus, especially the USD, they get news coverage constantly making it easy to track its trends in response to market changes.
This pair usually has the same low spread as EUR/USD with the same liquidity. The trends are easy to read and will usually correspond with other currencies that are paired with the Japanese Yen, giving a new trader many points of reference to base their speculations on.
This pair is included for the new Forex trader who is more advanced than most. While easy to track due to the number of indicators readily available, it does make its moves faster than the EUR/USD and USD/JPY. There is more opportunity for profit here with short trades, but just as much opportunity for larger losses, so make sure that you are using stop-loss tools and assessing your risk to reward ratio carefully if you do choose to start your trading with this pair.
What are Crosses?
A cross is any currency pair that doesn’t include the USD. The only cross I would suggest to a new trader is the EUR/GBP, and only if you have a specialized knowledge of one of these currencies. There is very little spread with this pair and its movements are similar as those seen with the EUR/USD.
These pairs are coming from countries that have a high amount of valuable natural resources such as crude oil, precious metals and grains. The most common currencies from these types of nations are those from Australia, Canada and New Zealand. The trouble with commodity pairs is that there are a number of outside factors that affect their movements. Unless you have a special ability to analyze how Middle Eastern strife will affect the value of the Canadian dollar, you should stay away from commodity pairs for now.
The pair you choose to start with is going to be the one that your strategies and plans are based off of in the future. Stick with those that are easy to follow so that in those first months of Forex trading you can focus more on how to hone your skills and learn how to read indicators to become a successful money maker.