The Foreign Exchange market is where investors from around the world come to exchange one currency for another. The investor is buying one currency while simultaneously selling another currency. Dozens of currencies can be exchanged and all at varying rates that fluctuate constantly. There is the potential for profits for investors that can accurately predict which way the rates will fluctuate for any given period of time. The first decision investors must decide is which currency pairs to invest their money.
An investor does not necessarily lose money when the exchange rates are falling. As is with equities, investors can profit from trades whether prices go up or down—if they predict correctly. Typically the greater the fluctuation (regardless of direction), the greater the potential for profit.The foreign exchange market as a whole is considered to be very volatile and very fluid meaning that prices fluctuate substantially. While the foreign exchange market as a whole may be both volatile and liquid, this does not mean that all currency pairs are equal. Some currency pairs are traded in such low volumes and are so consistent in their exchange rates that they are both unprofitable and hard to liquidate.
The Dominance of the U.S. Dollar
Many of the transactions on the foreign exchange market are financed with the U.S. dollar. The liquidity of the U.S. dollar allows investors to unload positions easily when they become unprofitable.
Major Currency Pairs to Consider
There are dozens of currencies that can be exchanged some are more profitable than others. Seven of the currencies that trade with the U.S. dollar that account for many of the transactions in the Forex market are:
1. Euro (EUR)
2. British Pound (GBP)
3. Swiss Franc (CHF)
4. Canadian Dollar (CAN)
5. Australian Dollar (AUD)
6. New Zealand Dollar (NZD)
7. Japanese Yen (JPY)
How to Select Currency Pairs
Selecting the best currency pair involves selecting the pair of currencies that produces the greatest price movement with least volatility. Investors will need to use analysis (fundamental or technical) to identify the best opportunities along with entry and exit points.
