Most traded Forex currency pairs, also called major currency pairs, make up a great deal of the Forex transactions out there: As you could easily see, all Forex currency pairs ultimately consist of USD and another common currency. Together these total to about 75% of all currency traded on the Forex market. So, what is it that causes so much trading interest in these particular currency pairs? The answer is simple: Fear.
Simply put, fear causes traders to buy and sell Forex markets using very large amounts of funds. This is the same reaction that financial institutions and businesses have when they encounter large losses. For Forex traders this means that the availability of large profits is limited and spreads are tighter as smaller sums are expected to be disbursed across fewer buyers and sellers. This results in fewer opportunities for large liquidations and consequently smaller spreads – and smaller profit margins.
Spreads are the difference between the value of one currency with that of another. In Forex this is expressed as the amount of currency per unit. The larger the spread, the larger the gap between the bid and asking prices – and therefore the larger the potential gain or loss. The size of this potential gain / loss depends on how “spot” the exchange rate between two currencies is, which is usually updated by governmental or central banks.
Now one of the most traded currency pairs in the Forex market is the EUR/JPY (Germany yen). The EUR/USD (Germany dollar) is currently the most popular Forex pair. The reason for this popularity is that this trade is the simplest. (If you know anything about Forex trading you’ll know that this simplicity is the key to success). It is a direct “face to face” transaction and therefore there is no need for brokers, banks or third party financial intermediaries. The euro/japanese yen is therefore a very simple trade that can be executed at any time of day.
One of the other things that sets the EUR/JPY apart from other currency pairs is its relative liquidity. Whereas many other pairs have less than average liquidity, the EUR/JPY has average liquidity of over 95%. This means that most traders are able to make trades without facing the problem of timing their transactions so that they benefit from both increasing liquidity and falling volatility. It is for this reason that the EUR/JPY is now the most actively traded currency pairs in the Forex market.
The relationship between the EUR/USD and the UK dollar is also beneficial to forex traders. The relationship is this: When the EUR/USD strengthens, this means that the US dollar weakens against the EUR/USD. This is an attractive proposition to investors as it means that the interest payments to the British pound will decrease (since it is denominated in US dollars). As such the EUR/USD becomes more powerful in the global market until eventually it reaches a point where it trades above the pivot point (the moving average line for the currency pairs that are part of the forex market). At this point the EUR/USD begins a sustained move upwards with the potential to continue to move upwards until it meets a resistance at a specific price (the resistance level).
One of the main reasons why the EUR/USD has such a strong history is that this market is very liquid one. However, since this market is so liquid, many traders will miss out on good trading opportunities by being too close to their choice of currencies. This means that the relationships between the currencies are not as strong as they could or should be, which limits the ability for traders to take advantage of trading opportunities. Although this weakness in the trading relationship does make these particular pairs particularly vulnerable, there are other factors that also contribute to the strength of this pair. The fact that this market is still open during the business hours (and night) means that there is always an opportunity for traders to enter in the direction of the strongest currency pair.
Another reason why the EUR/USD has a history of being so strong is because it is the only pair of currency pairs that includes two of the most widely traded and important world currencies – the US Dollar and the Euro. This means that there is a significant potential for profit from both sides of this trading structure. In addition, there is also a large gap between the premiums that can be generated between these two pairs. The EUR/USD is currently one of the best paid currency pairs in the world making it the obvious choice for any trader looking to generate a risk/reward scenario. If you have an online broker, then take a look at the latest listings to see if there is any opportunity to benefit from this volatility.