The Forex market is one of the biggest and most liquid in the world, with a total daily average trading volume of USD 5.1 trillion in April 2016, according to the Bank For International Settlements (BIS).
Most of this trading activity is concentrated within 5 countries:
- United Kingdom
- United States
- Hong Kong SAR
These sale desks intermediated 77% of all currency trading in April 2016, according to BIS statistics.
Since 1986, the BIS monitors all Forex market activity every three years to spot any changes in global financial markets, in order to know how currencies in the world are traded.
Some of these factors include:
- International trades, trading volumes
- Exchange rates
- Widely traded currency pairs, etc.
When traders invest in the Foreign Exchange market, it’s mainly because they want to take advantage of frequently traded Forex pairs with a large average daily price, allowing them to make big profits.
What are most popular traded currencies?
The chart below is from the Triennial Central Bank Survey of the BIS, which represents the daily averages in April 2016 of the Forex Exchange market turnover by currency pairs between 2013 and 2016, net-net basis, in percent.
#1 The American Dollar (USD)
There are several reasons why the American Dollar is the most traded currency in the world.
At that time, the USD was the only currency convertible in Gold, which makes it the standard unit of currency in the international commodity market today, especially with Gold and Oil.
It’s a trustworthy, stable, and reliable currency, which makes it the most used in international transactions. The American Dollar is widely accepted throughout the world as a medium of exchange, and a means of payment, in many countries.
#2 The Euro (EUR)
The Euro is the 2nd most traded currency, and the 2nd largest reserve currency.
While it was introduced on January 1st, 1999 to 11 countries, it is now the official currency of 19 countries within the European Union.
Not all EU member states have the Euro as their main currency, but over 337 million EU citizens now use Euro coins and notes.
In addition, more than 20 countries outside the Eurozone have pegged their currencies to the Euro in order to stabilize their exchange rates, such as Bulgaria, Bosnia, and about 15 African countries.
#3 The Japanese Yen (JPY)
The Yen, the official currency of Japan, is the 3rd most traded currency in the foreign exchange market.
It’s also the most liquid currency in Asia, and the 4th most important reserve currency in the world (after the U.S. Dollar, the Euro, and the Pound Sterling), especially for Asian countries.
Even though the country has very high debt levels and doesn’t have a high growth economy, Japan seems to provide more stability than the majority of the other world economies.
For this reason, traders are confident in its economy, and the Yen is seen as a safe haven in times of high volatility and uncertainty.
The Yen carry trade is among the most well known and popular currency carry trade strategies among investors – this is where traders will borrow Yen because of the low interest rate in order to buy currencies with higher interest rates, making profits on the difference.
What are most popular traded currency pairs?
Remember the basics of currency trading.
When you invest in the Forex market, you buy or sell currency pairs – not currencies.
To know at which price you can do so, just have a look at FX quotes, which represent the buying (ask) and selling (bid) prices depending on your scenario:
- If you think that the AUD/USD is going up, you would go long (buy the currency pair),
- If you think that the GBP/JPY is going down, you would go short (short-sell the currency pair).
In the above examples, the Australian Dollar (AUD) and the British Pound (GBP) are called the base currency, while the American Dollar (USD) and the Japanese Yen (JPY) represent the quote currency.
There are different sorts of currency pairs you can trade with different kinds of trading conditions associated.
Major currency pairs
These currency pairs are the most traded. They all have the American Dollar either as a base currency, or a quote currency.
You will usually have the best trading conditions with these pairs: tighter spreads, lower margin requirements, higher leverage, etc.
- EUR/USD Euro/U.S. Dollar
- USD/JPY U.S. Dollar/Japanese Yen
- GBP/USD Sterling/U.S. Dollar
- USD/CHF U.S. Dollar/Swiss Franc
- U.S. Dollar/Canadian Dollar
Minor currency pairs
Minors are also called cross currency pairs. These represent less traded pairs.
They usually do not have the U.S. Dollar on either side, but they do contain one of the major currencies.
- EUR/GBP Euro/Sterling
- GBP/CAD British Pound/Canadian Dollar
- NZD/JPY New Zealand Dollar/Japanese Yen
- EUR/AUD Euro/Australian Dollar
- GBP/JPY British Pound/Japanese Yen
Exotic currency pairs
Exotic currency pairs usually have one major currency against a currency from a developing, or smaller, economy.
Because these currency pairs aren’t found as often as the others – they aren’t exactly most liquid currency pairs, they can actually be among the most volatile currency pairs, trading these can be more expensive, with a wider spread than more conventional pairs.
- JPY/NOK Japanese Yen/Norwegian Krone
- GBP/ZAR Sterling/South African Rand
- AUD/MXN Australian Dollar/Mexican Peso
- EUR/TRY Euro/Turkish Lira
- USD/THB U.S. Dollar /Thailand Baht
Foreign exchange market turnover by currency
The chart below is from the Triennial Central Bank Survey of the BIS and represents the daily averages in April 2016 of the Forex Exchange market turnover by currency between 2013 and 2016.
The most popular currency pairs between April 2013 and April 2016 were the USD/EUR, representing 23% of all transactions, followed by the USD/JPY, and the USD GPB, which represented 17.7%, and 9.2% of the transaction respectively.
As you can see, the USD is the world’s most important vehicle currency, as the BIS reported that it was on one side of 88% of all trades during the period. The EUR and the JPY lost market share against the USD, while many currencies from emerging markets increased their share.
Before trading these pairs, you should fully understand the risks
To maximise chances of earning the biggest profits, Forex traders often develop trading strategies around highly liquid, top traded currency pairs. One short-term Forex trading strategy that is often used is called “news trading” or fundamental analysis, whereby one trades according to news events.
Trading around high-impact events consists of investing on the highest volume currency pairs – as they will usually be the most profitable currency pairs to trade. This means that traders will invest money during the release of economic data or other news, or during important speeches, or conference press, such as when a central bank decides whether to increase or decrease its interest rates.
It’s one of the most aggressive and active fundamental strategies, and it’s also a high-risk, as the trading volume, and the associated volatility, are larger than under “normal” trading circumstances.
To use this strategy, most traders need to be aware of the economic calendar.
So, which currency pairs are worth trading?
This all depends on the type of trader you are.
For the short term
For instance, a short-term trader will focus on the most traded currency pairs with the best bid/ask spread possible to make quick profits thanks to higher volatility.
For the long term
On the other hand, a longer-term position trader will not necessarily look for the most liquid or volatile currency pairs.
Same goes for those who make currency carry trades. This method focuses on the rate differential between the 2 currencies in the aim of making profits based on said difference, as opposed to trying to get the best entry and exit points possible.
Also, remember that there is a certain degree of correlation between currencies, and consequently between currency pairs.
For example: If you invest on the EUR/GBP, and the EUR/CHF, both currencies are positively correlated – which means that they tend to evolve in the same direction. Because they both have the EUR as a base currency, if the EUR weakens against its major counterparts, then both currency pairs will lose ground, and your portfolio will take a hit.
For this reason, be sure to diversify your FX portfolio by taking into consideration currency correlations.
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CHAPTER QUICK LINKS
- 2.Why is Forex Popular?
- 3.Why Forex is (or isn’t) for You
- 4.How Does Forex Work?
- 6.History of Forex Market
- 7.FX cash, CFD or Spread Bet?
- 8.How Margin Trading Works
- 9.Best Time of Day to Trade
- 10.Forex Regulation And Protection
- 11.Forex Trading Examples
- 12.Making a Living Trading Forex
- 13.Mind, Money, Method
- 14.Forex Risk Management Strategies
- 15.Winning Forex Strategies
- 16.Technical vs. Fundamental Analysis
- 17.New Forex Trader Mistakes
- 18.Dangers of Forex Trading
- 19.Next steps