Forex trading is one of the most popular forms of trading in the financial markets. The foreign exchange market, also known as forex, is a decentralized market where currencies are traded. It is the largest and most liquid market in the world, with an average daily trading volume of over $5 trillion. However, not all currencies are created equal, and not all forex trades are equal. In this article, we will explore what to trade and not trade in the forex market.
What to trade in forex?
1. Major currency pairs
The major currency pairs are the most actively traded currency pairs in the forex market. These pairs include the US dollar, Euro, Japanese yen, British pound, Swiss franc, Canadian dollar, and Australian dollar. These currencies are considered to be the most stable and liquid, and they are traded in high volumes. The major currency pairs are ideal for beginners as they offer low spreads and are less volatile than other currency pairs.
2. News-driven currency pairs
News-driven currency pairs are pairs that are affected by economic news releases. These pairs include the US dollar, Euro, British pound, and Japanese yen. Economic news releases such as GDP, inflation, and employment reports can greatly impact the value of these currencies. Traders who are familiar with the economic calendar can take advantage of these news releases to make profitable trades.
3. Exotic currency pairs
Exotic currency pairs are currency pairs that are not as actively traded as the major currency pairs. These pairs include the Mexican peso, South African rand, Turkish lira, and Brazilian real. Exotic currency pairs offer higher spreads and are more volatile than major currency pairs. Traders who are experienced in forex trading can take advantage of the higher volatility to make profitable trades.
What not to trade in forex?
1. Illiquid currency pairs
Illiquid currency pairs are currency pairs that are not actively traded. These pairs include the Thai baht, Indian rupee, and Indonesian rupiah. Illiquid currency pairs have higher spreads and are more volatile than major currency pairs. Traders who are not experienced in forex trading should avoid trading illiquid currency pairs as they can be difficult to predict.
2. Cross currency pairs
Cross currency pairs are currency pairs that do not include the US dollar. These pairs include the Euro, British pound, and Japanese yen. Cross currency pairs have higher spreads and are more volatile than major currency pairs. Traders who are not experienced in forex trading should avoid trading cross currency pairs as they can be difficult to predict.
3. Currency pairs with high political risk
Currency pairs with high political risk are currency pairs that are affected by political events. These pairs include the Turkish lira, Russian ruble, and Venezuelan bolivar. Political events such as elections, civil unrest, and government policy changes can greatly impact the value of these currencies. Traders who are not experienced in forex trading should avoid trading currency pairs with high political risk as they can be difficult to predict.
Conclusion
Forex trading can be a profitable venture for traders who are experienced in the financial markets. However, not all currencies are created equal, and not all forex trades are equal. Traders should focus on trading major currency pairs, news-driven currency pairs, and exotic currency pairs. Traders should avoid trading illiquid currency pairs, cross currency pairs, and currency pairs with high political risk. By focusing on the right currency pairs, traders can increase their chances of making profitable trades in the forex market.
