Forex means “foreign exchange“, meaning that it involves the engagement of something for another. In this case however, it involves the exchange of money with, well, money – albeit, that of another country. As a result, in forex, currencies are always quoted in pairs. When we say, what is the value of the Dollar, we have to balance it against another currency, say the Euro. As such, there will be as many prices for the Dollar as there are currencies. So, we may have the EUR/USD at $1.1000 and then USD/JPY at ¥105.00.
However, there are some currencies and currency pairs that are traded more often in the markets – both in the physical spot markets and the electronic (“financial) markets. This is so because these currencies and currency pairs belong to the most economically advanced nations in the world, and are always demanded cross-border transactions that happen between these countries. The 6 most traded currencies are:
Major Traded Currencies of The World
- United States Dollar
Popularly known as the greenback, the USD is by far the most important currency in the Forex market, as it is reportedly involved in at least 87% of all daily transactions. This is because it mostly serves as the intermediary in triangular transactions, and also because a number of countries pegged their currencies to the Dollar. One major factor that seems to seal the Dollar’s dominance in the Forex markets is the fact that almost all major commodities in the world have their prices quoted and sold in Dollars, chief amongst them being crude oil and gold.
The official currency of the European Union is the second most demanded and thus traded currency. Factors attributable for this include the fact that the Euro is the official currency of the 28-member European Union, countries that are really large economies if they were to stand alone; for example, Germany and France. Other reasons are that a good number of countries, especially in Africa, happen to peg their currencies to the Euro, to prevent undesired volatility, and finally, the Euro is the second-largest reserve currency in the world.
- Japanese Yen
The most-traded Asian currency is sometimes used as a gauge of the performance of other currencies, especially in the Pan-Pacific and Southeast Asia regions. One very unique role that the JPY plays in the Forex markets is it utility for carrying trades. Carry trades involve speculating to profit from the difference in interest rates between two countries. The JPY is usually borrowed at minimal costs because it boasts ultra-low interest rates; then the money is used to invest in other currencies with high-yielding rates, profiting from the difference in the process.
- British Pound
The Great Britain Pound comes at the fourth most traded. It has the same fundamentals working for it as the Euro in that a number of countries peg their currencies to it, and that it also serves as a huge reserve currency.
- Canadian Dollar
Popularly referred to as the Loonie, the Canadian Dollar is unique for its relationship with commodities. Canada is a major producer of commodities such as crude oil, rare earth metals and minerals, as such the rate of the CAD tends to move in tandem with these commodities, and trading the Loonie can be an effective way to speculate in the commodities market
- Swiss Franc
One factor that might be attributed to the Franc’s rise as an important currency is the place of Switzerland as a global financial center. Not being a commodity currency and largely not affected by global economic and socio-political happenings, the Swiss Franc (CHF) tends to be one of the least volatile amongst the majors.
- Australian Dollar
Popularly referred to as the dollar does, the AUD owes its prominence to Australia’s position as an economic giant. Just like the CAD, the AUD is also vulnerable to movements in the commodities markets as the AUD is the second-largest producer of Gold and a major producer of other important metals. As a trader, you have to watch movements in these markets when trading the AUD.
Other notable mentions include the New Zealand Dollar (NZD) and the South African Rand (ZAR), as both are quite popular with Forex traders but have not quite reached as much prominence as those outlined above. One other currency is the Chinese Yuan (CNY); although an important currency in global economics, it is not really popular among retail traders and speculators.
Having outlined the most popular currencies, then we now low look at the most traded currency pairs.
- EUR/USD (Euro/US Dollar) – popularly known as the Fiber. Accounts for at about 28% of all trades in the market.
- USD/JPY (US Dollar/Japanese Yen) – accounts for 13%.
- GBP/USD (Great Britain Pound/US Dollar) – responsible for 11%.
- AUD/USD (Australian Dollar/US Dollar) – 6%.
- USD/CAD (US Dollar/Canadian Dollar) – 5%.
- USD/CHF (US Dollar/Swiss Franc) – 4%.
- NZD/USD (New Zealand Dollar/US Dollar) 4%.
You may have observed something; and that is the fact that the US Dollar is involved in all of the above. A rule of thumb for “Major Pairs” is that they are major currencies (outlined above) against the Dollar. You may ask: Does it mean that other currencies don’t trade against each other, like the GBP against the JPY? They do; but they have a category of theirs known as “Minor Pairs”.
When a major currency pair does not involve the Dollar, they generally fall into minor pairs. The most traded minor pairs include:
- EUR/GBP (Euro/British Pound)
- EUR/AUD (Euro/Australian Dollar)
- GBP/JPY (Great Britain Pound/Japanese Yen)
- CHF/JPY (Swiss Franc/Japanese Yen)
- NZD/JPY (New Zealand Dollar/Japanese Yen)
- GBP/CAD (Great Britain Pound/Canadian Dollar).
There is a third category known as Exotic Pairs. They consist of emerging economies’ currencies. Examples include:
- EUR/TRY (Euro/Turkish Lira)
- USD/HKD (US Dollar/Hong Kong Dollar)
- JPY/NOK (Japanese Yen/Norwegian Krone)
- NZD/SGD (New Zealand Dollar/Singapore Dollar).
Which is best? Which should I trade?
The answer to the question is dependent on several factors including your personality, risk appetite, capital size, amongst others. The majors have certain advantages over minors. For one, they have very high liquidity which guarantees lower spreads, ease of trading, less volatility, and almost no slippage; and importantly, because of their popularity, you have access to more trading support. Most profitable forex signals (like the ones provided by the highly-rated 1000Pip Builder) are mostly based on the majors.