Although US dollar and euro is the most popular currency pair, many entrepreneurs think of alternatives looking for profit in the Swiss franc, Japanese yen or Chinese yuan. But what currencies are the best to invest in at the moment?
So How to Make Money on Currencies?
In order to make money on currencies, go to Forex. It is a difficult and erratic market, though, so you should gain experience and develop an appropriate strategy before starting investing. Investing in currencies without proper preparation can end tragically.
Choosing the right broker is the most important thing to start with. The investor gains access to Forex through an intermediary. This broker will charge a commission for each transaction, and its amount may be a decisive factor in whether he or she will be successful. If your strategy is based on multiple buying and selling strings, a low spread is essential.
In order to make money on currencies, you must first of all choose the right currency and develop a good investment strategy.
Learn Major Currency Pairs
In currency pairs, the first one is called the base currency and the second one is the quoted currency. The most important value for currency pairs is their relation to each other, e.g. the value of the AUD / USD pair is 0.76158, which means that one US dollar is currently worth exactly 0.76158 Australian dollar.
The main currency pairs are those involved in operations the most often. It is not a term describing the best currency pairs to invest, although main currency pairs have many features that make investing easier (especially for beginners) such as the fact that it is easier to find materials describing trends and relationships regarding major currency pairs. Furthermore, brokers also offer lower spreads for major currency pairs.
At the moment, the main currency pairs on Forex include:
- EUR/USD –– euro / US dollar
- GBP/USD –– pound sterling / US dollar
- USD/CAD –– US dollar / Canadian dollar
- USD/JPY –– Japanese yen / US dollar
- USD/CHF –– Swiss franc / US dollar
- AUD/USD –– Australian dollar / US dollar
- NZD/USD –– New Zealand dollar / US dollar
As you can see, all major currency pairs include the US dollar. This is due to historic economic provisions in which the US dollar replaced gold in terms of reserves in central banks and the primary reference to other world currencies. Therefore, even when an investor trades currency pairs that do not contain the US dollar (called cross pairs), their value is still determined in relation to the USD.
Major currency pairs account for 70–75% of operations performed in Forex, so they are the most liquid and valuable pairs in the global economy. Moreover, such a large volume of flow makes them also highly volatile currencies.
What Currency Pairs Are the Best to Trade?
High volatility can be both a downside and an advantage in trading, depending on your strategy. When choosing the main currency pairs, the investor certainly does not have to worry about liquidity or… the lack of hints on how to handle a given pair.
The EUR / USD pair, being the most popular, is considered to be burdened with low investment risk. It usually has a small spread with intermediaries and you can easily find relevant publications about trading this currency pair.
USD/JPY is an interesting pair. Yen is considered a safe haven and has grown stronger in times of crisis and uncertainty. Compare the relationship between the yen and the S&P500, which is an index that lists the value of shares of the largest American companies. As the crisis approaches, the yen becomes stronger and the S&P500 index drops.
Those, who are well versed in domestic politics, may be tempted by the EUR/PLN pair. Polish zloty is not considered a good currency to invest in, but local entrepreneurs may be tempted by the high dependence of the zloty on the WIG20 index.
Also, Let’s Find Out How to Choose Currency Pairs
Currencies are invariably tied to the economies of their countries or regions, so it’s good to target what you know –– either local currencies or a region of the world which geopolitics is well known to the entrepreneur.
Another important issue is the strategy and looking for connections and trends. Ultimately, however, it all comes down to individual choices. There are more or less popular currency pairs, but that doesn’t mean they are better or worse. So to answer your question of how to choose currency pairs we’d say –– do it carefully, according to your own strategy, speculations and knowledge.