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Choosing The Best Currency Pair

May 2, 2010 · 3 comments

in Forex Trading

The two main features you need to look at when you want to know which currency pair is the best for your forex trading strategy are the trading volume of the currency pair and the fundamentals of the economies behind the currencies.

1. Trading Volume of The Currency Pair

If you are into forex trading for quite a while, you have probably heard that you should choose the currencies that are traded the most. The basic reason for that is that these currencies are highly liquid which means that you will enter your trades exactly where you want and you will not suffer often from slippage. Another important reason is that brokers offer tighter spreads and lower fees for these currency pairs because there is strong competition between them and additionally the majority of traders trade with these currency pairs.
The most traded currency pairs are 3 and US dollar is included in all of them.

The pair with the highest volume is Euro and US dollar or EUR/USD, second in volume is the Japanese Yen and US dollar or USD/JPY, and the third one is the British pound and US dollar or GBP/USD.

2. Fundamentals Of Currency Pairs

The correlation between two countries economy is a very important factor, which determines how the currency pair of these countries behave in the forex market. For example, the pair of Euro and British pound usually does not make big moves because the economies of Eurozone and Great Britain have a strong correlation and they have common economic interests. On the other hand, pairs like EUR/USD and USD/JPY tend to be more volatile because the correlation of the economies behind the currency pairs is not so strong.

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