If you want to be able to effectively trade the Forex, then you need to understand how Forex pairs work. “Forex pairs” is another way of saying “currency pair.” All trading in the Forex market is done not with individual currencies, but with currency pairs. To trade the U.S. Dollar (USD) you have to choose another currency to trade it against. This is why understanding Forex pairs is so important. It’s not enough to understand one currency. You have to understand how two currencies are going to relate to one another.
The major currencies, and major currency pairs, will account for nearly 80-85% of all Forex trades world wide. The reasons for this are fairly simple and straight forward. The strongest economies are often the most stable and come from the most stable governments. This security and strength of economy is what makes these main currencies strongest and the best to trade.
Look at Zimbabwe’s hyperinflation as a reason why smaller nations and nations with dictators aren’t trusted in currency trading. There are too many variables, and an economy can completely change overnight. Governments that operate by Democracy and that are strong aren’t likely to fold. Economies given freedom to operate on their own also tend to work in a stable way. Even the most unstable weeks or months in the United States would have less effect on the currency than if China’s leadership decided to shut out all foreign investment tomorrow.
This is part of the reason China’s currency hasn’t broken into the major players, while nations like Canada and New Zealand have. While it’s unlikely that China would have a sudden shift like this, it is possible. That type of insecurity is why China’s Yuan isn’t going to be in position to stand up with the CAD, NZD, or CHF any time soon.
The most common Forex pairs will get traded the most because the Forex market is volatile enough without the dangers of governments shutting down foreign investment, military coups, or any of the other common worries associated with these nations.
Russia fighting Georgia, China cracking down on dissent, India and Pakistan – even modern developed nations can be too unstable for good currency strength.
So when you’re looking for a good currency pair to trade, don’t get cute with Yuans, Pesos, or Rubles, but stay with the big dogs. They provide all the profit opportunity that a good Forex trader needs.