Currency Trading: What are the Best Trading Currency Pairs and Why?

One of the many reasons why forex trading has gained in popularity over the past five years is its inherent flexibility. Besides easy access and sophisticated tools provided by brokers, the investment vehicle can be approached from many different angles depending on the personality of the trader and his personal inclinations. There are numerous trading styles, and timeframes can be adjusted to fit as many trading strategies as can be devised. However, the forex arena is not for the faint of heart. It has a high-risk profile, and specialized training is a must for any chance at success.

Assuming that the necessary preparation has been achieved and a competent forex broker has been selected, the next forex course step would be to choose a currency pair upon which to focus your efforts. The major pairs include the U.S. Dollar paired with seven other global currencies - volume shares are depicted below (the New Zealand Dollar is included in "All Others):

ISO, an international standards body, has set 3-digit currency codes as follows:

AUD - Australian Dollar ( or "Aussie")
CAD - Canadian Dollar (or "Loonie")
EUR - Euro (or "€")
JPY - Japanese Yen (or "¥")
GBP - British Pound (or "Sterling" or "£")
CHF - Swiss Franc (or "Swissie" or "S?")
NZD - New Zealand Dollar (or "Kiwi")
USD - U.S. Dollar (or Greenback or "$US")

You may encounter a further classification of the AUD, CAD and NZD as being a commodity currency. Their trends tend to follow their respective commodity prices: Australia for iron ore, coal and precious metals; Canada for oil; and New Zealand for agriculture and forestry products. The currencies may often correlate with the S&P 500 index, as if to resemble a barometer of global economic health.

Combinations of these currencies without the U.S. Dollar are often called the "Crosses", and the remaining currencies of the world are referred to as "minors" or "exotics". As the volume declines, liquidity and access become more limited, and spreads offered by brokers expand to accommodate higher cost and risk characteristics. Some countries may also "peg" their currency's value to another currency or prohibit trading altogether.

The best currency trading pair depends on a trader's preferences that are somewhat tied to the values in the following table for the top four pairs:

The British Pound tends to be more volatile and less predictable than other pairs, the reason for the "Expert" moniker. Since the Euro and USD pairing constitutes the highest volume, less volatility, and tighter trading spreads, it is frequently the currency pair of choice by both beginners and advanced players. The Swiss Franc correlates to the Euro, but less volume and other unique qualities require a more experienced touch.

Longer-term traders may prefer the commodity currencies for various carry trade strategies where economic differences and interest rates may translate to appreciation and interest carry gains. The Australian Dollar has been the favored target currency for this type of trade, but its upper mobility may also be currently approaching a level of high resistance.

All currencies tend to rise and fall over time. Unlike stocks, "intrinsic value" is nowhere to be found. "Relative value" is the name of the game with currencies, based on a market comparison and evaluation of each country's respective economy. The "best pair" has more to do with current fundamentals and trends than anything else.