With a daily turnover of over 5 trillion dollars, the forex market is the largest financial market in the world. One of the fundamental principles of forex trading is understanding currency pairs.
Every currency pair in forex represents the value of one currency against another. However, the answer is not straightforward regarding identifying the most profitable currency pair in forex.
This guide will dive into the factors that can help you identify the most profitable currency pair for your trading strategy.
What do you need to know about forex currency pairs?
Before we move into the profitability factor of a forex pair, let’s briefly describe what forex pairs are.
Currency pairs work by comparing the value of one currency against another. For example, if you want to trade the EUR/USD pair, you buy or sell the Euro against the US Dollar.
The exchange rate between the two currencies determines the currency pair’s value.
Forex pairs have three main types: major, minor, and exotic currency pairs.
Major currency pairs are the most traded, including EUR/USD, USD/JPY, and GBP/USD.
Minor currency pairs, also known as cross-currency pairs, include currencies that are not the US Dollar. Examples of minor pairs include the EUR/GBP and the AUD/CAD.
Exotic currency pairs include currencies from emerging markets and are generally less traded than major and minor pairs. Examples of exotic pairs include the USD/HKD and the USD/SGD.
Factors affecting forex pair’s profitability
Several factors can offset any forex pair. When we are talking about profitability, we need to consider these factors. They are:
- Economic indicators such as GDP, inflation rates, and employment figures can all impact a currency’s value and, therefore, the profitability of a currency pair.
- Political factors such as elections, political instability, and government policies can influence currency values and profitability.
- Market sentiment, which refers to the overall feeling of traders towards a particular currency or market, can also impact profitability.
So, which pair is the most profitable?
We don’t want to be the bearer of the bad news, but no single currency pair is the most profitable in forex trading.
The profitability of a currency pair depends on a range of factors, as we mentioned earlier.
However, some traders believe that major currency pairs like the EUR/USD, USD/JPY, and GBP/USD are generally the most profitable because they have the highest trading volumes and are more liquid than other currency pairs.
Additionally, these pairs are less volatile than exotic pairs, making them a safer option.
Other currency pairs, such as the AUD/JPY or USD/CHF, may be more profitable during certain market conditions.
On the other hand, exotic currency pairs, such as the USD/TRY or the USD/MXN, can offer higher profits due to their higher volatility. However, they are riskier than forex majors and minors.
Ultimately, the key to forex trading profitability is a solid understanding of the market and a well-developed trading strategy.
By understanding how currency pairs work and the factors that impact their profitability, you can make more informed decisions, eventually leading to more winners than losers.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.