There are some forex platforms that have as many as 50 currency pairs to choose from. Of all these currency pairs, which can be classified as being the top 6 forex pairs?
The choice of our top 6 forex pairs is based on the intraday movements and the performance of these pairs in the last 5 years when it comes to price volatility, as well as the volume of trade in those currencies. The criteria for choice will also have to take into consideration the fact that there are three major financial trading market zones in the world, and the choices of the local traders in these zones will have a bearing on the final list.
The best forex pairs are those that have good range of intraday movements and produce enough volatility that traders can take advantage of. They are also currencies for which there is a ready market and can be traded with high liquidity, with the attendant reduced cost of trading in the form of lower spreads.
In forex, there are certain currencies that are referred to as major currencies and others that are classified as minor currencies. The major currencies are those of nations that mostly make up the G7 industrialized nations. They are the most traded currencies in the market and their pairings usually attract lower spreads because they are highly liquid. These major currencies are:
- Euro (EUR)
- US Dollar (USD)
- British Pound (GBP)
- Swiss Franc (CHF)
- Japanese Yen
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- New Zealand Dollar (NZD)
If there are major currencies, then there are minor ones. The minor currencies are not as traded as the major ones, and are sometimes referred to as exotic pairs. They lack the volume that major currencies command in the market, and as a result are illiquid and have wide spreads. Examples of the exotics are:
- Swedish Krona (SEK)
- Russian Ruble (RBL)
- Turkish Lira (TRY)
- Norwegian Krone (NOK)
- South African Rand (ZAR)
- Singaporean Dollar (SGD)
- Brazilian Real (BRL)
- Hungarian Forint (HUF)
- Hong Kong Dollar (HKD)
When discussing what the top 6 forex pairs should be, the topic should be looked at in the context of the volume of trade for each currency pair in each time zone. Three time zones exist in the forex market. These are:
- London time zone
- New York time zone
- Asian time zone
A look at the volume of trade in each of the time zones will reveal the following currency pairs as the top 6 in terms of volume:
- London: EURUSD, GBPUSD, USDJPY, AUDUSD, USDCHF, EURGBP, USDCAD and EURJPY.
- New York: EURUSD, USDJPY, GBPUSD, AUDUSD, USDCAD, EURJPY, USDCHF, EURCHF, EURGBP.
- Asia: we will use the Australian and Tokyo time zones as representative of the Asian zone. The currencies traded in the highest volume in descending order are AUDUSD, EURUSD, USDJPY, GBPUSD, USDCAD, EURJPY, EURGBP, USDCHF (Australia) and for Tokyo, USDJPY, EURUSD, EURJPY, AUDUSD, GBPUSD.
One thing stands out. Traders in a particular zone are more likely to trade the currency local to that zone than any other one. The other currency most likely to be traded is the US Dollar, which is the currency of international trade. That is why in London, the Euro, British Pound and US Dollar make up the most traded currencies, with the EURUSD and GBPUSD being the top currency pairs in that zone. In New York, the USD is definitely going to be used for most currency transactions as a local currency and as an internationally used currency, so its’ pairing with the Euro, British Pound and Japanese Yen (the currency of its number two trade partner) will be the top currency pairs by volume. In Asia, the Asian currencies (AUD, JPY) in addition to the USD will be the constituent currencies in the most traded pairs.
So the top 6 major currency pairs by volume when we consider the choices from across the three major financial zones are:
- EURUSD: Typical spread is from 0.8 pips to a maximum of 3 pips. We are yet to see a forex platform in the market today where the EURUSD has gone above 3 pips in spreads.
- GBPUSD: Typical spread is between 3 – 4 pips.
- USDJPY: Spread is between 0.8 pips to 2 pips.
- AUDUSD: Average spread is between 3 – 4 pips.
- EURGBP: Spread is about 4 pips.
- GBPJPY: Spread is between 7 – 8 pips on most forex platforms.
In some areas of the world, the volume of trade in the EURUSD is more than 50% of total trade volume. This is especially true in areas that fall under the London time zone as this is naturally an area where you expect the European currency to be widely traded. This is not unexpected as the Euro is used geographically by more countries and more people than any other currency. This has given it wide appeal and when you combine the Euro with the US Dollar which is the currency of international trade and the global reserve currency, you have in the EURUSD a massively traded currency pair which deserves to be at the very top of the list.
The choice of the top 6 forex pairs will serve as a guide for traders to know where to put their money for the best volatility, intraday range and spread costs. What this list also serves to do is to guide traders into when they should be trading the currencies that they trade. For instance, there is no reason for a trader located in Asia to be trading a currency pair like the GBPCHF when the Asian zone is in active swing, or for a trader in Europe to trade the EURJPY during the New York session. In these two instances, the Asian trader can choose the EURJPY or GBPJPY, or even the AUDUSD, while the European traders should trade the EURUSD since the US Dollar is actively traded in the New York session.
Currency pairs will be more active when the zones they originate from are the active time zone in the market. So if a trader is to trade any of the top 6 currency pairs in an active time zone, it should be the currency pair most active during that time zone.