You’ll find that some currencies are traded much more frequently and in much greater volume than others. Most forex traders look to trade currencies that offer good volume and frequency, which translates into good liquidity.
The Forex overall offers great liquidity but not all currency pairs are necessarily very liquid. However, if you stick to trading “the majors” (the most traded currencies) low liquidity should not be an issue in your trading.
Trading currency pairs with high liquidity is important for a number of reasons. Liquidity means there is plenty of volume so you can enter trades when you want to and exit trades when you want to. Liquidity keeps you from getting stuck in a trade when all you want to do is to get out.
High liquidity also means there is enough movement in the major currency pairs so you can enter and exit trades numerous times a day and make a profit.
So which are “The Majors”?
All the majors include the US Dollar as part of the pair, either as the base or the counter currency. The majors make up roughly 85% of all forex trading volume and include four main currency pairs:
EUR/USD (EUR/US Dollar)
GBP/USD (British Pound/US Dollar)
USD/JPY (US Dollar/Japanese Yen)
USD/CHF (US Dollar/Swiss Franc)
Other frequently traded currency pairs are the:
AUD/USD (Australian Dollar/US Dollar)
NZD/USD (New Zealand Dollar/US Dollar)
USD/CAD (US Dollar/Canadian Dollar)
The above pairs are also called the Commodity Pairs or Commodity Crosses, since they include the currencies of commodity reach countries. Note: all the commodity pairs are traded against the US Dollar.
Trading the above currency pairs has many advantages including:
- High liquidity, as discussed above.
- Low trading costs as spreads for all the major crosses typically are very low. Spreads may range from 2,3 or 4 pips, depending on your broker, your account and the time of day you trade.
- Greater consistency in price movement. Make no mistake, nothing is guaranteed when trading! However, trading the majors does provide some consistency due to scheduled releases of economic data and general news coverage available regarding the respective economies.
Even though the above currency pairs are the most commonly traded pairs, they are not the only currencies traded in the Forex. Since every country has a currency, many different currencies can be traded in the foreign exchange.
These currencies are referred to as the “Exotics”. Trading an exotic currency means that you may have to deal with low trading volume, illiquidity and higher, if not expensive, bid-ask spreads.
When trading exotics, you should also be prepared to deal with increased country risk since what goes on in the country will affect its currency. Politically, some countries may not be very stable and their economies might be rather unstable as well. All of this translates into greater exposure to risk for traders.
The Exotics may include currencies like the South African Rand, the Polish Zloty, the Uruguay Peso or any number of other less commonly traded currencies.
In summary, the US Dollar is the most traded currency and the greatest trading volume takes place in the major currency pairs. Other less known currencies are available to trade, however, there may be greater risk associated when trading exotics.