Choosing the Right Forex Currency Pair for Maximum Profitability

Why Is It Important to Understand the Differences Between Currency Pairs?

One reason traders worldwide are drawn to Forex is its immense scale. With daily trading volumes reaching trillions of US dollars, Forex offers deep liquidity and high volatility, which attract both experienced and novice traders. Another key advantage is the broad range of trading instruments available. For instance, AMarkets offers 44 currency pairs to choose from.

Naturally, traders want to know which pairs have the potential to generate higher profits and what factors should guide their choice. Let’s explore these questions.

Factors Influencing Currency Pair Profitability

The profitability of any Forex strategy depends on the cumulative success of all trades over time. Here are some important factors that can impact the profit from individual trades:

• Liquidity: Liquidity refers to the ease with which a trader can buy or sell a specific trading instrument at the current market price. High liquidity ensures that there are sufficient buyers and sellers to facilitate smooth transactions, resulting in faster trade execution and often more stable prices.
• Spread: Liquidity also affects the spread—the difference between the buy and sell prices. Generally, the higher the liquidity, the narrower the spread. Since the spread directly impacts your costs, a lower spread can significantly improve trade profitability.
• Volatility: This is the rate at which a currency pair’s price fluctuates. Higher volatility can provide more trading opportunities, but it also increases risk.

Types of Currency Pairs

Currency pairs are typically grouped into three main categories:

1. Majors

Major currency pairs are the most traded pairs in the forex market. They include well-known combinations such as EUR/USD, GBP/USD, and USD/JPY. These pairs are characterized by high trading volume, which results in high liquidity. This liquidity leads to low spreads (the difference between the buying and selling price) and fast trade execution. Many short-term traders prefer major pairs due to their low spreads, while long-term investors appreciate their stability and transparency.

Currently, the seven major currency pairs are:

• 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)
• NZD/USD (New Zealand Dollar/US Dollar)

These pairs often involve the US dollar, which is considered the world’s primary reserve currency and is involved in approximately 88% of all currency trades.

2. Minors

Minor currency pairs, also known as cross currency pairs, do not include the US dollar. Examples include EUR/JPY and GBP/AUD. Although they are less liquid than major pairs, they are still actively traded. Minor pairs often have higher spreads compared to majors; however, they can also exhibit more noticeable price movements, creating potential profitable opportunities for traders.

Some common minor currency pairs include:

• EUR/GBP (Euro/British Pound)
• EUR/AUD (Euro/Australian Dollar)
• GBP/JPY (British Pound/Japanese Yen)

Cross currency pairs allow traders to engage in direct exchanges between two different currencies without involving the US dollar, providing additional trading flexibility.

3. Exotics

Exotic currency pairs consist of one major currency paired with a currency from a smaller or emerging economy. Examples include USD/ZAR (US dollar/South African Rand), USD/RUB (US dollar/Russian Ruble), and USD/MXN (US dollar/Mexican Peso). These pairs typically have lower liquidity and much wider spreads compared to majors and minors. As a result, they can be riskier to trade.

Exotic pairs can experience significant price swings even from minor news events due to their lower trading volume. Traders who are willing to take on additional risk may find high-profit opportunities in these movements.

Which Currency Pair Suits Your Strategy?

Now that you know the categories, let’s look at which pairs align best with different trading strategies:

• Scalpers using technical analysis often favor major pairs due to their low spreads and high liquidity. However, if you prefer trading on news events, exotic pairs may offer more dramatic movements, though you’ll need to understand which economic releases impact these currencies the most.
• Investors looking to make long-term transactions, spanning from several days to weeks, should primarily focus on major currency pairs. The main challenge they face is accurately identifying the medium-term trend, which can be quite difficult. However, it’s worth noting that the EUR/USD pair tends to be much more predictable compared to pairs like USD/ZAR.
• New traders should start with majors, regardless of strategy. Focusing on these pairs will help you understand how fundamental and technical analysis work, along with developing a risk management system. Once you’ve gained experience, you may gradually explore less common pairs if you’re comfortable with higher risk.

Conclusion

Choosing a currency pair should align with your trading strategy and experience level. Major Forex pairs provide high liquidity and low spreads, making them ideal for beginners and long-term investors. Meanwhile, traders who can tolerate higher spreads may find greater profit potential in less popular pairs. No matter your choice, always remember the basics of risk management: set Stop Loss and Take Profit orders, diversify your portfolio with different pairs and CFDs, study analysis methods, and you’ll be well-equipped to start profiting across a wide range of instruments.