Currency CFD trading has gained immense popularity due to the leverage it offers with lower margin requirements. This article discusses currency pairs that are commonly traded and provides essential guidance for informed trading, such as how to incorporate technical analysis, factors for selecting a currency pair, and the implementation of sound risk management techniques. Finally, traders may choose to apply these principles in a demo account to improve their trading skills.
Currency trading has become increasingly popular in recent years as it offers traders the opportunity to gain exposure to the forex market and use CFD leveraged trading with lower margin requirements than in equity markets. The currency market is also the largest and most liquid market in the world with nearly $7.5 trillion dollars traded each day in 2022. This makes the forex market an ideal place for traders looking for high leverage trading.
However, before diving into the fast-paced world of forex CFDs, you need to understand the most popular currency pairs and how to trade them. In this article, we will examine the top currency pairs traded globally and outline several common trading strategies to help you understand the different ways market participants approach these volatile assets.
Understanding currency pairs
A currency pair is the exchange rate between two different currencies. In currency trading, all currencies are traded in pairs because when you buy one currency, you are simultaneously selling another currency.
Each currency pair consists of a base currency and a quote currency. The base currency is the first currency in the pair, while the quote currency is the second currency in the pair. For example, in the currency pair EUR/USD, the EUR is the base currency, and the USD is the quote currency. Applying this to an exchange rate of 1.1000, this means you would need 1.10 dollars, the quote currency, to buy 1.00 Euro, the base currency.
Major currency pairs are the most commonly traded currency pairs and include the US dollar, Euro, Japanese yen, British pound, Canadian dollar, and Australian dollar. These currency pairs typically have high liquidity, tight spreads, and average volatility.
On the other hand, minor currency pairs and exotic currency pairs have lower liquidity, wider spreads, and higher volatility.
There are several factors that affect exchange rates between the currencies, including economic indicators, central bank policies, geopolitical events, and market sentiment. Familiarising yourself with those factors can help you better understand the price trends, but some traders will choose to simply focus on chart reading to make informed trading decisions.
Top currency pairs
The most popular currency pairs traded in the market include the following:
- EUR/USD (Euro/US dollar)
- USD/JPY (US dollar/Japanese yen)
- GBP/USD (British pound/US dollar)
- AUD/USD (Australian dollar/US dollar)
- USD/CHF (US dollar/Swiss franc)
- USD/CAD (US dollar/Canadian dollar)
These currency pairs account for over 60% of the total currency trading volume, according to the 2022 BIS triennial report. EUR/USD is the most traded currency pair, accounting for approximately 23% of the total trading volume.
Each currency pair has its unique characteristics, benefits, and drawbacks. For instance, the EUR/USD is the most liquid currency pair and has tight spreads, making it an ideal pair for beginner traders. On the other hand, the GBP/USD has a higher volatility level, requires higher margins making it suitable for more experienced traders.
Key considerations for trading currency pairs
Trading forex CFD pairs can be challenging as most traders lose money. However, there are a few strategies that can help separate the winning traders from the losing traders.
1. Understanding market trends using technical analysis
As mentioned earlier, each trade is buying one currency while simultaneously selling another. Therefore, picking the correct direction of that trend is essential to winning trades.
Many of the best traders implement some form of technical analysis and chart reading.
Example of Bullish Engulfing Candlestick Pattern. Source: TradingView. Past performance is not indicative of future results.
Chart readers love using tools such as moving averages, support and resistance levels, and chart patterns. For example, in the chart above, there is a bullish engulfing candlestick pattern that follows a downtrend, this suggests price may rally.
A trader recognising this pattern might consider buying depending on how they view the chart price action.
2. Choosing the best pairs to trade based on market conditions
Choosing the best currency pairs for online trading may vary based on the market’s condition at that time.
Examples of economic uncertainty and growth. Source: TradingView. Past performance is not indicative of future results.
For example, during times of economic uncertainty, safe-haven currencies such as the US dollar and Japanese yen tend to perform well, while during times of economic growth, commodity currencies such as the Australian and Canadian dollar tend to perform well.
By understanding the market conditions and choosing the best pairs to trade, traders can increase their chances of success.
3. Implementing risk management technique
Any form of trading involves risk. Therefore, it's important to implement risk management strategies to limit potential losses, such as using stop-loss orders.
A stop-loss order is a resting order placed through the platform, if the market reaches the selected stop price, the stop-loss order will convert to a market order and attempt to execute at the best available market price at the time of execution. For example, a trader who bought EUR/USD at 1.1000, might place a stop-loss order at a certain distance below their entry price depending on their trading strategy, risk tolerance or any other factor a trader may consider.
Also, most currency trading is conducted on margin using leverage. This means the trader can control trade sizes larger than the amount of capital in their account. If the trader aggressively uses the available high leverage (low margin requirements) on their account to open more trades, then the market needs only to move a small amount to trigger large gains or large losses in their account.
4. Know when to exit a trade
Many traders spend a lot of time focusing on the trend and ideal entry point of a trade. With most traders losing money, are they simply betting on the wrong side of the trend each time?
One of the reasons was studied thoroughly by Daniel Kahneman and is known as Prospect Theory. Too often, traders will sit on losing trades for too long and close down winning trades too early. This causes traders to miss out on further gains while exposing their account to additional losses.
One widely recognised method for managing these behavioural instincts is to define an exit strategy before a position is opened. Traders often aim to maintain consistency by adhering to a pre-set plan. Many market participants prioritise opportunities where the potential profit is significantly higher than the potential risk, for example, by identifying setups with a 1-to-2 risk-to-reward ratio.
5. Practice on a demo account
If you are new to forex CFD trading or if you want to try out buying and selling popular currencies, then apply for a demo account at OANDA. A demo account allows you to practice trading with virtual money in a simulated trading environment, without risking real funds.
Demo trading is a great way to gain experience, test your trading ideas, and build confidence before trading with real money. Plus, you can access our full range of currency pairs along with advanced mobile charting functionality on OANDA's mobile app.
At OANDA, we know how important speed and reliability are when trading currencies. If you feel ready to trade, make a smart decision: get easy access to the most popular currency pairs with a regulated, award-winning broker.
Conclusion
Forex CFD trading has become a popular investment option with nearly $7.5 trillion in daily trading volume in 2022. Six of the most popular currency pairs generate 60% of the total volume and can be easily traded on relatively low margin requirements.
Before diving into the world of forex CFDs, understand the insights and key considerations from successful traders, such as using fundamental analysis, technical analysis, take note of the market conditions, planning your trade exit ahead of time with a stop-loss, and practising these strategies in a demo account.
This article and its contents are intended for educational purposes only and should not be considered trading advice. Leveraged trading carries a high degree of risk. Losses can exceed your investment.
