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You can lock the most suitable currency pair for trading.

Whether you are an investor or a trader, you can make a profit based on understanding the currency. Selling currencies that are overvalued and buying currencies that are undervalued is what every trader wants to do.

However, not all currency pairs have the same transaction value. Some currency pairs have high liquidity and low spreads. Some currency pairs are difficult to trade due to their volatility. In this article, we can look at how to find good trading partners and which currency pairs are most suitable for trading.

Investment VS Trading

Learn Forex Trading, An Introduction to success conditions and benefits in an easy-to-understand manner

Investment and trading are still different in some respects. Investment cares more about the long-term, and price corrections in the short term will not attract attention. Because of the long-term holding of assets, investors need to have a good understanding of market fundamentals, and the amount of investment needs to be sufficient to safely tide over short-term price fluctuations.

Traders are just the opposite; they care about short-term market conditions. The holding time is as short as a few seconds, as long as several weeks or months, and their opening frequency is much higher than that of investors.

Many traders prefer technical analysis and do not rely too much on market fundamentals because they believe that the fundamental impact on prices is mainly in the medium and long-term market. The capital threshold for transactions is much lower, and some traders will specialize in small corrections to the transaction price. They basically use leverage tools.

Fair value area: 20-day and 50-day moving averages

To find the most suitable currency pair for trading, a good way is to find its fair value.

A currency transaction price higher than the fair value is overvalued, and vice versa, it is overvalued. Over time, currencies that are overvalued tend to depreciate, and currencies that are undervalued will appreciate.

So how do you determine which currencies are overvalued and which are undervalued? Long-term investors will use traditional currency valuation models to determine the fair value of a currency, such as purchasing power parity (PPP), interest rate differences, and so on.

In foreign exchange trading, moving average is a very popular tool; it can actually help us determine the fair value of a currency.

We apply the 20-day moving average and the 50-day moving average to the chart. The 20-day moving average calculates the average price of the currency pair over the past 20 days, and the 50-day moving average calculates the average price over the past 50 days.

The price of any financial instrument can be regarded as the result of the consensus reached by all market participants, so are the 20-day moving average and the 50-day moving average.

If a group of currency pairs is trading above these two moving averages, then it is likely that this group of currency pairs is overvalued. Similarly, if the market is below the two-day moving average, it is considered undervaluation. Since the market tends to return to the average, we can regard the area between the two moving averages as the fair value area.

Take advantage of risk sentiment.

Measuring current risk sentiment is also a good way to discover foreign exchange trading opportunities.

Risk sentiment also fluctuates frequently. If some market participants have a high-risk appetite, then some traditional currencies may fall in value (price), such as the Swiss franc and the Japanese yen. The value (price) of the Australian dollar and the New Zealand dollar will increase in an environment with a high-risk appetite.

The question is what to measure the current market risk sentiment. Some traders use the VIX index, and some follow news events.

The best currency pair suitable for trading

In addition to the above mentioned, judging that the currency price is too high or too low, and the current market risk sentiment, some currency pairs have been in the ranks of currency pairs suitable for trading for a long time, regardless of the current market conditions. Highly liquid currency pairs, such as EURUSD, have lower spreads, which can effectively reduce transaction costs, and the slippage situation of transactions at any time is much better than that of many other currency pairs.

EUR/USD

EUR/USD is the most actively traded currency pair. The U.S. dollar is involved in nearly 90% of currency transactions, and the euro is more than 30%. This group of currency pairs has the largest trading volume, which means that the liquidity of trading EUR/USD is very good. Many novices start their trading journey from this group of currency pairs.

GBP cross currency pair

The British pound is the fourth most active currency pair and the favorite currency of many foreign exchange traders. The pound cross currency pairs, such as GBP/JPY, GBP/AUD, CAD/GBP, etc., attract many traders because of their high volatility, especially in times of important news, the volatility will increase. If you want to trade these currency pairs, remember to reduce the size of your position and keep an eye on the risks.

Rare currency pair

Most of the rare currency pairs are from developing countries, such as Brazilian real, Argentina and Mexican pesos, South African rand, Indian rupee, Russian ruble, Turkish lira, and so on.

These currency pairs may have periods of extreme price fluctuations, so they have greater profit potential. In addition to economic fundamentals, political risks will also affect these currency pairs, so you need to be careful.

For details, see “Heavyweight Report: The global average daily foreign exchange transaction volume is 6.6 trillion U.S. dollars, and Shanghai ranks among the eight largest trading centers for the first time.”

Concluding remarks

To find the best trading currency, you need to start with your trading style. If you are good at long-term investment, it is best to study economic fundamentals and pay attention to the factors that affect the value of money. If you are a short-term trader, you can use some of the methods mentioned above, such as two moving averages, to find the fair value area and judge the state of currency prices.