The forex market is lucrative for beginners and experienced traders alike because of high liquidity, various trading options, and earning potential that can be successfully realized with a properly chosen forex pair. Then the first question a trader should ask themselves is what pairs to trade and how to predict trends to make a profit off them. In this article, we will explore the trending potential of forex pairs, how to select the best pairs in forex, and uncover short-term and long-term trends.
Identifying Trends and Selecting The Best Currency Pairs for Forex Trade
It is a truth universally acknowledged that forex pairs (currencies to trade against each other) do have strong trends shaping over long periods of time in comparison to the stock market. It happens because currencies represent whole states or even unions of several countries (like EUR of the Eurozone). State economies develop over years (even decades), and their currencies dutifully reflect this development (or decline, for that matter). Macroeconomics is the key factor determining the trend.
Stocks represent individual companies that compete against each other within the same national economy or in the global markets. Their success depends on management, innovation, financial success, and whatnot. Thus, one company in the industry may fail or drag behind miserably, while the other or others will be highly successful. So, to get an understanding of stock potential, one needs to explore the microeconomics of this particular company from quarter to quarter, from one financial statement to another one.
Practical Dos and Don’ts of Picking Trending Pairs
Now, how to uncover these promising trends of currency pairs to trade and catch a long-haul ride? One idea is to follow the diverse economic news about the source countries of the forex pair, but that’s a task for a whole analytical department, not a solo trader.
Other traditional suggestions for picking the trending pairs include following the liquidity and spread parameters. However, the forex market abounds in liquidity, and many trending pairs are highly liquid. The most famous pair EUR/USD is the most liquid in the world. Other pairs, except for very exotic ones, do not fall far behind. So, liquidity is not the best clue for selection. Spreads in the forex market are also reasonable, because of liquidity and volumes of trades.
The most viable solution is to explore the price movement trends and pick the pairs that demonstrate the strongest and the most profitable trends. It sounds like a circular explanation, but here’s a key secret: long-term trends can be identified by means of technical analysis, and tools for that analysis are provided within every forex platform.
If you know the major currency pairs, commodity block pairs, and some pairs that are widely popular and liquid, you can analyze their behavior over various timespans and pick the best forex pairs to trade that match your vision and expectations.
The Major Currency Pairs: What Are They?
Some pairs may seem obvious, but some may surprise you. The major (most liquid and traded) currency pairs include:
- EUR/USD (Euro / US dollar)
- GBP/USD (British pound / US dollar)
- USD/JPY (US dollar / Japanese yen)
- USD/CHF (US dollar / Swiss franc)
The popularity of the EUR/USD pair is easily explained. It represents two outstanding global powers, two huge economies when measured on the global scale, plus the high level of innovation and technological excellence that underlies those economies.
EUR/USD is truly the world’s largest major pair, the most liquid financial instrument across the globe. The trading volumes amount to $1 trillion of notional value per day, trades running 24 hours 5 days a week, from Tokyo to London and New York trading sessions.
Japan is technologically advanced, but its big influence in the financial markets also plays a role. It hosts the Tokyo Foreign Exchange, one of the pillars of the global forex landscape, and this fact cannot but positively impact the Japanese yen.
The UK with its GBP seems to be out of place since its economic capacity can be overshadowed by India ($2.65 trillion of GDP) or closely mimicked by Brazil ($2.05 trillion of GDP). However, the financial tradition lets Great Britain hold the upper hand. The UK was the first country to establish and develop elaborate markets of capital along with the stock exchanges, and American exchanges were modeled after the British ones. London still remains the heart of the global forex operations (in contrast to reigning American stock exchanges like NASDAQ and NYSE). The combination of these facts, plus the special fiscal position the UK entertained in the Eurozone until the exit from it, secured a place for GBP among the major forex pairs.
Swiss franc holds its place among the major pairs because of the impeccable Swiss financial system and scrupulousness that makes it the epitome of the best financial practices. The Swiss franc is known as "liquid gold" because once it was supported by gold at about 40% of its value. Even today this franc is considered a good choice for protecting your investment against financial turmoil big and small.
If major currencies represent the most influential and capacious economies, there may come a logical question about the Chinese yuan, since it represents one of the world’s leading economic powers. However, the yuan (sometimes named renminbi interchangeably) is closely controlled by the centralized financial system of China and its price is not free-floating. Moreover, the yuan is not freely traded at forex markets, and only very few platforms offer such currency pairs to trade (with very big leverage and level of risk). Finally, investors cannot buy yuan directly and hold it; rather, they can either purchase its investment equivalent in US dollars that will be denominated in yuan, buy yuan-based ETFs, or deal in futures. That’s not the idea that stands behind forex trading, so that’s why the yuan is still out of reach for most small- and mid-size traders.
Commodity Block Currencies and What They Represent
When we move on to listing specific currencies that are trending today, you will see that some currencies do not stand for big economies. Rather, they stand for unique commodities or resources their economies supply. So the trends for these currency pairs will be influenced by the prices of the specific commodity (or commodities), and supply and demand on the global markets.
These pairs are AUD/USD (Australian dollar / US dollar), NZD/USD (New Zealand dollar / US dollar), and USD/CAD (US dollar / Canadian dollar).
Australia is a renowned exporter of precious metals, and gold in particular. When the global price of gold in US dollars rallied for two consecutive years, AUD featured a very strong uptrend, too.
New Zealand exports a wide variety of commodities, from dairy, meat, and wool to wood and metals. When one or more commodities see price boosts in the mid-term, NZD also grows. However, its economy is impacted by oil imports, which spills into the costs of petrol and affects other industries. Hence, NZD/USD rates are a system of checks and balances.
Canada is a big crude oil exporter, with the USA being one of its biggest customers. USD and CAD stand in reverted relation, so when CAD becomes stronger, the pair follows a downward trend.
Long Term Trends: The Significant Insight That Cannot Be Overestimated
Since in forex best currency pairs to trade behave differently and depend on their price fluctuation on different factors, the most reliable way to identify a trend is to apply technical analysis. For the majority of cases, the three-line simple moving average indicator suits best. Each line represents the average of different time intervals, usually short, mid-term, and long-term ones. One line may average 1-week values, the second one may average 20-day values, and the last one works with 65-days values. If all three lines go in the same direction (up or down), the trend is strong, and the pair is trending.
In the image above the long-term trend for EUR/USD is visible, but it is jagged, and from a mid- or short-term perspective it can look totally different. The long-term trend is bullish, and the short-term trend is bearish. However, after every correction, the price bounces back and reaches a new high.
If all three lines [of simple moving average] go in the same direction (up or down), the trend is strong, and the pair is trending.
For convenience, you may pick different values for your three-line average, but the key is the interplay of short-term, mid-term, and long-term price trends as shown by the moving average. It will prompt you the most and the least trending forex pairs.
Now let’s put EUR/USD even into a bigger perspective. Since March 2018, the price has been oscillating between the same support and resistance values in the long-term trend, thus remaining relatively neutral. It does not form a strong upward or downward trend yet, starting its rally around 1.150, reaching approximately 1.230, and falling back to approximately 1.150 two times in a row. The moves from support to resistance and back take around a year or more each, thus creating smaller trends of their own.
From a mid-and short-term perspective, the support and resistance fluctuation shown on the image below provides valuable opportunities for making profits. That’s why it is important to catch long-term trends (spanning a year or more), but also to apply technical analysis of 3 moving averages for determining short- and mid-term trends that can be different from the bigger picture.
Top 10 Of The Most Trending Forex Pairs
Now the most interesting part: the currencies that now demonstrate strong trends and can be traded accordingly. Definitely, every experienced forex trader will name his or her own best pairs to trade forex and will (probably) share the tips on picking the right pair for the right time.
Yet for your convenience, this particular list includes major pairs, commodity block pairs and some exotic currencies, to put it all into a broader view.
Trending Currencies and Price Changes in %
(the data processed as of January, 2022)
|Currency Pair||Change in % for last 2 weeks||Change in % for last 3 months||Change in % for last 6 months||Change in % for last 12 months|
The first three pairs marked in red belong to different currency categories, but in the given table, they show that a strong trend is forming. How is that visible without a chart? For every averaged interval, from short (2-week) to mid-term to long-term (1 year), the direction of the trend is the same: it goes downward, the price declines. So, on the chart, all four moving average lines would be heading in the same direction.
For currencies that feature three averages heading in the same direction out of four, the trend may be a bit weaker, but still predictable, just don’t forget to cross-test it regularly.
The biggest price change has happened in USD/ZAR, with the price going 15.28% up through the year. However, since there are two averages heading down and two heading up, the trend direction should be followed carefully, so as not to put an open position in danger. ZAR is considered to be an exotic currency, with many risks connected to the developing economy and stability of the financial system of the issuing country.
Let us look closer at numbers for the pair EUR/USD, one of the traditionally best currencies to trade. As you see, the trend for the period January 2021 - January 2022 is steadily heading downward. Three averages out of four, including the annual one, show a bearish tendency. However, let’s get back to the image showing the price tendencies for 1999-2022.
In this big perspective, this annual downward trend is only a part of a larger neutral trend, where the price oscillates between support and resistance levels. The given 5.71% decrease in price is the return to the support level. For trades that do not last long, say, from days to months, this downward trend is a valuable way of making profits.
For investors who plan to hold their positions longer, for years, maybe, the picture is different, since it defines when it’s better to buy during these years-long swings. And yes, regular cross-checking of trends is a must, for detecting longer and shorter currency trends and making the best use of them.
This is a brief introduction to trending currency pairs and how to find trending forex pairs. Major pairs are the most sought-after and liquid, although they may not provide much space for speculation and money-making. Commodity block currencies depend on a variety of factors, so technical analysis for determining trends is the best solution. Tools for analysis are provided at every forex platform, JustMarkets not being an exception, and all you have to do is to master them, beginning with moving averages. Then you’ll be able to pinpoint trends, make smart forex operations, and get profits, and JustMarkets will be your trusted partner on this way.