Can we be painfully honest with you for a moment?
Not thank-God-they-told-me honesty, when somebody points out that you have spinach on your teeth. No, we’re talking about the sucker-punch-straight-to-the-face kind of honesty.
It’s hard. It’s uncomfortable. It’s unexpected.
And we can almost guarantee that you will NOT like it.
There is no such thing as a most profitable currency pair in forex – at least not one that would work well for everyone.
Sorry, but that’s the truth.
The great thing is that, depending on your situation, certain currency pairs will work better. In other words, some factors influence which currency pairs are the most appropriate, and choosing these pairs over others can indeed improve your performance.
Sound interesting? Let’s talk about it.
So that those who just wanted a quick answer are not completely let down, we’re going to start by giving you simple advice that helps you highlight one go-to currency pair.
The Best Forex Pair – The Concept of Competitive Advantage
If you want to trade only one pair with the best possible odds, consider a pair in which you have some sort of competitive advantage.
Here’s how Google defines competitive advantage:
Basically, the term refers to an aspect of a company that provides the company with some unique benefits. For instance, having a strong relationship with suppliers or a highly skilled labor force are both examples of competitive advantage.
Now, how does this relate to forex trading?
Just like companies, forex traders can have a competitive advantage.
From having a well-defined trading plan to possessing favorable personality traits, many things can put you ahead of others. For this guide, just concentrate on one thing: Location.
If you want to pick only one currency pair to trade, pick something with your local currency in it.
It should make sense.
Unless you live in some dictatorship without a fully convertible currency, this will always be a safer bet than trading random currencies you have never touched.
You are exposed to local news and market developments to a much larger extent than are people from abroad. You can keep an open eye and might recognize early trends that are not immediately apparent from a global perspective. This is true even if you live in a larger country such as the US.
For example, if most people around you save money instead of spending, you might conclude that economic activity is low, and the FED might cut rates to stimulate consumption.
If you’re not that economics-savvy, it’s still more likely that local business news will reach you sooner than what’s happening in other parts of the world.
Those of you who are interested in trading more pairs but want to narrow your attention to a few “best”, keep reading.
Currency Pairs – Are They All the Same?
If you’re just getting started with forex, this might be a valid question.
There are different types of currency pairs, typically referred to as majors, minors, and exotics.
So, to answer the question: No, not all currency pairs are the same. However, currency pairs in the mentioned groups more or less share the same characteristics.
Major Currency Pairs
Major currency pairs are the currencies of the most significant economies paired with the US dollar. The US dollar is important because central banks around the world maintain large USD reserves to meet international debt obligations, perform investments, and influence their domestic rate when needed.
Not surprisingly, major currency pairs are the most frequently traded pairs, which means two things for you as a trader:
- They move a lot during the day, so you have plenty of trading opportunities.
- Brokers tend to charge less commission (spread) on them.
Majors include:
Minor Currency Pairs
When a currency pair doesn’t include the USD but includes the currencies of two developed economies, it’s referred to as a minor or cross currency pair.
Minors are not as frequently traded as the majors, but it hardly ever matters, because they’re still very active and provide an abundance of trading opportunities.
The most popular minor pairs involve the EUR, JPY, and GBP.
Minors with EUR
Minors with JPY
Minors with GBP
Exotic Currency Pairs
Exotic pairs consist of the currency of an emerging or semi-developed economy and the currency of a developed economy. Exotics are typically less active and more prone to erratic price movements. Furthermore, they are more expensive to trade.
Some examples:
Pick Pairs According to Your Trading Approach
By now, you should have gone from asking, “Which currency pair is most profitable in forex” to asking, “Which currency pairs are the most profitable in forex for me?”
This second question has a much clearer answer.
The most profitable pairs for you are those that match well with your trading approach. If all pairs are good fits, then all pairs have the potential to make you money, but this is rarely the case.
The only thing we have to define is what trading approach means.
Basically, we refer to your trading style and trading strategy.
As you can se above, these are related, but let us explain.
Your trading style is determined by the length, timing, and frequency of your trades. There are four different trading styles and every active trader fits into one or the other – even if they don’t know what a trading style is (rare).
The different trading styles are:
- Day trading
- Position trading
- Swing trading
- Scalping
(Check out this guide if you want to learn more about trading styles and who should choose each.)
Your trading strategy is based on your trading style and it contains rules on how to enter and exit your trades.
As we have already said, when deciding which currency pairs to trade, you will want to consider your trading approach.
In essence, if you have a scalping or day trading strategy, you need the fastest moving pairs with the lowest costs possible.
Expensive pairs would destroy your profit margin and, most often, they don’t move enough to qualify for intraday trading anyway. So, your best choice is probably sticking to major pairs, maybe blending in some of the most popular minors.
On the other hand, swing traders and position traders are not limited to cheaper and active pairs, as they shoot for larger gains over a longer time horizon. Trading both majors and minors can work well.
What about exotics?
Exotics are often susceptible to rapid changes depending on local political conditions, so unless you have a good understanding of the underlying economic situations, we don’t recommend that you trade them.
If you do have the knowledge, you might find that they are a good candidate for a position trading portfolio.
Consider Keeping a Watchlist
If you want to trade dozens of pairs, carefully analyzing all of them every day might be difficult.
In this case, you might benefit from keeping a watchlist. This basically means that you periodically skim through all your potential pairs and pin those that look promising.
For example, if you’re trading trends on the daily chart, you would quickly check your pairs every week and keep those charts open that show a clear trend. That way, you can avoid clustering your terminal with too much data.
It’s not really relevant for day traders and scalpers but swing or position traders might benefit from this idea.
Conclusion
People talk about which currency pair is the most profitable in forex all the time. Unfortunately, few realize that there is no such thing and that the best you can do is to find the pairs that make the most sense for you.
If you don’t think about trading strategically, and always look for shortcuts and holy grails, you’ll find yourself spinning your wheels, doing something that doesn’t yield any results (apart from losses).
So make sure you plan everything, from your trading style to a great strategy. That way, you’ll see which currency pairs fit into the picture and create the best possibility for making money.