Getting started in forex, also known as foreign currency, is a great way to learn about volatility in the market. The reason for this is that if there is any word that describes forex, it is volatility.
But why is that? How can a whole category of securities be labelled as “volatile”? Well, it comes down to how foreign currency works, and how it differs from things like stocks. To begin with, consider what stocks are: A single security that goes up when it goes up, and goes down when it goes down.
Today, we are going to talk about the forex trades you should make to start out in the market. But first, let’s talk about how foreign currency works so you have an idea of how we are evaluating each one.
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Explaining Foreign Currency 💱️
Foreign currency, on the other hand, can be a bit funny in the way that it works. This is because every currency is bought as a pair. That means the amount of money you invest is a calculation between the two currencies in the pair. This is why forex will be listed in a format like: GBP/JPY.
GBP/JPY is the code for the exchange between British Pounds Sterling and Japanese Yen.
Foreign currency pairs call the first currency the “base currency” and the second currency the “quote currency”. You are always selling the base currency to buy the quote currency. In this case, you are selling British Pounds for Japanese Yen.
Why Foreign Currency is Volatile 📊️
Because of this, if either one of the currencies moves, then the price of the security moves. And since one currency shrinking usually means that another gets more valuable in response, foreign currency will basically always move at least twice as much as you think it will whenever something happens.
This is to say nothing of the fact that currency is the most fundamental element of commerce. Literally anything in the world can affect the value of a currency. Is there a new president of Japan? Does that best selling novel have a British author? Did a gold mine in a former British colony collapse?
All of these and more will make one currency rise and the other fall. And if they do not affect the currency directly, they will have an indirect effect. If there is a shooting in Cairo, Egypt, then the resulting hit to Egyptian currency can impact British business and lower the British pound.
The Best Forex Currency Trades you can Make ➡️
Foreign currency is always traded in pairs. It is incredibly volatile because you are buying a security with two underlying values that are always changing. But anyone who has been in the market for more than a few minutes will tell you that volatility presents as much chance for runaway gains as crippling loss.
So, here are some of the best foreign currency trades you can make right now. All of these can be easily found on whatever trading platform you can use which trades foreign currency.
1. EUR/USD – Best Overall Forex Currency Trade
This is the obvious one to anyone who has looked at the foreign currency market by volume before.
The reason is that selling the Euro to buy United States Dollars accounts for literally one fourth of all foreign currency trades. That is staggering when you think of how many currency pairs there are in the world.
The Euro Goes Almost Everywhere
But the more you think about it, the more it makes sense. One on hand, the Euro serves dozens of countries. And not only that, it is traded in many more. The Euro goes tons of places, and anyone who holds Euros but does not need them particularly will likely view them as a form of investment.
Even in the United Kingdom, where our involvement with the European Union is now years gone by, the Euro is still an accepted currency at most businesses. While it would be preferable that everyone switch over to the British pound entirely, there are just too many Euros in the country to give Euros up.
Almost all of that applies to the United States Dollar as well. While they do not track one-to-one, there are tons of currencies that are pegged to the dollar. Australian dollars, Caribbean nations, plenty of resource-rich African nations, they all derive their value relative to the USD.
That means it is quite easy to find buyers and sellers between the currency pair, and you will frequently get a deal that will benefit you. The size of these currencies make them prone to change, so one will eclipse the other one day, and then undergo a reversal before the end of the same day.
2. USD/JPY – Best Forex Currency Trade for Asian Markets
If the fact that it was in the top two currency pairs did not signal this to you, let’s spoil the surprise now: It is hard to trade in foreign currency without channeling cash through the United States Dollar at some point. It is the most traded currency in the world by far, making up more than half of all forex trades.
Its trade with Japan has two advantages: The first is that the money can go to lots of places. While it is easy to get absorbed into the history of all the conflicts that east Asian nations have had, those do not impact modern commerce. What impacts modern commerce is purchasing ability.
The Value of Japanese Yen
The core appeal of Japanese Yen is the fact that it lets you buy things from Japan. Japan has one of the biggest consumer cultures in the world, making it a sort of focal point for a lot of different kinds of luxury spending in the region. It is not the only one, of course, but it is the one most people use.
The reason so many people use it is related to the second advantage Yen has: The Bank of Japan. Similar to the Federal Reserve in the United States, the Bank of Japan directly controls interest rates on loans of Yen. These interest rates affect loans both foreign and domestic too.
You can argue on the internet all day about the virtues and vices of centralized banking, but there is one thing you cannot dispute: Economies with centralized banking make loaning money much easier for everyone. The reason is that when a centralized body like the Bank of Japan promises an interest rate, the recipient of the loan can basically be assured that there will be no fine print on that interest rate.
As a result, Yen ends up circulating across Asia simply because the Bank of Japan can easily give out intuitive loans that are then used to do business with Japanese companies. This creates a steady rate of inflating that people have come to rely on for business, amplifying the value of the currency even more.
This is part of the reason why, despite the fact that the United States Dollar is the United States Dollar, you are selling USD for JPY in this transaction. The USD might be used more and technically more valuable on an individual level: Japan will try harder to buy their currency back from you than the US.
3. GBP/USD – Best Forex Trade for UK Citizens
This one is a bit obvious to anyone living in the United Kingdom: British Pounds for United States Dollars. Who would have thought that our own currency would benefit from being traded for the most popular currency in the world? But the thing is that it is not that easy of a call to make on an economic level.
Question for those participating at home: Where does the British Pound get its worth? It is not tied to the gold standard, or the standard of any other mineral, and it is not linked to the USD.
The answer is that it's worth is calculated much like the USD and JPY is: By its ability to purchase luxury. That luxury does not always need to be British either, as many Eurozone countries take the British Pound too. But many people find themselves wondering: How does Brexit impact this?
Brexit’s Impact on the British Pound
The interesting thing about Brexit is that it has slowed down commerce for the United Kingdom, while at the same time increasing demand for our currency. This is not great for the working class, but the positive effect that it had can definitely be felt at the business class, where people invest in forex.
Why did this happen? Well, as business slowed down, the outflow of British Pounds from the United Kingdom slowed down as well. Many businesses on both the European and American sides of things were expecting there to be British Pounds so that they could pay British debts.
That is where the British Pounds’ focus on luxury purchasing works for it. There are yacht companies, designer car companies, and fashion companies that export from the United Kingdom and only take British Pounds. This is not why people trade the currency though; but those big-name companies give the currency value that it would not otherwise have, leveraging it more heavily than you would think.
4. AUD/USD – Best Forex Trade for Mineral Commodities
On the far other end of the spectrum lies the Australian Dollar. While it is technically tied to the United States Dollar, the Australian Dollar is an interesting currency. It can sometimes exceed the USD in value.
How can that be? If it is a derivative of the United States Dollar, how does it outpace it? To begin with, remember that this is foreign currency trade we are talking about.
Things are chaotic, and the most obvious (or in this case, most intuitive) of all answers is not always the correct one.
Here is the deal with Australian Dollars: Whether it is pegged to the United States Dollar or not, it incidentally belongs to a nation with a ton of access to natural resources, particularly minerals.
It is almost hard to believe in this world of mass interconnectivity that just because a country has more minerals under its soil, the currency of that country is worth more than that which does not. But think back to what we said about Japan: They will work hard to get their currency back into their country.
The Australian government, like many other governments, has programs in place that incentivise businesses to take Australian currency for their transactions. This not only encourages mineral extraction companies to do business in AUD whenever they can, it also means that any company that does the same will be getting a good discount on its business within the country.
Mineral Extraction: Australia’s Trump Card
This is particularly noteworthy when it comes to the trade of mineral commodities. Australia does not just mine minerals, it also has a massive refinement industrial complex. In fact, most of the Australian companies that do the most mineral extraction are located in Africa.
This means that there is a surprising amount of AUD floating around Africa, giving the currency value.
As the value of these industries increases, you can observe a pretty linear relationship with the value of Australian currency. This is what makes it a good currency to trade: Any currency that you can reliably predict the value of will be good to trade, whether it is cheap or expensive.
The reason is that when it is cheap, even if it is not worth much to hold, it is accessible to buy in good quantities. And when it is expensive, well, then you sell it. Australia gets so much of its value from mineral extraction that success in that industry is easy to track to the value of their dollar.
Again, this is an object lesson in how strange foreign currency can be. The United States Dollar could have the USD collecting systems in place that Australia and Japan have. But then the currency would become more centralized on the US landmass, and they actually do not want that.
In a lot of ways, the ubiquity of the USD comes from the fact that its value is kept at a certain point.
5. USD/CAD – Best Forex Trade Tied to Oil Exports
Just about everything we said about the Australian Dollar ends up applying to the Canadian Dollar. While it was once tied to the British pound, the Canadian Dollar is one of many currencies that is tied to USD.
But just like how increases in gains from the mineral extraction and refinement industries can lead to gains in AUD value, gains in the oil industry can lead to gains in the CAD value.
As always, however, it is not purely that simple. A good rule of thumb in general is that any statement in economics can be inverted and be analysed for just as much value. Therefore, if gains in oil increase CAD…
…Then losses in the oil industry can result in a decrease in the value of CAD. This is particularly relevant now, when the world is hot off the heels of the mass sanctioning of Russia for their invasion of Ukraine.
Canada and the Russian Oil Sanctions
While Canada was not reliant on Russian oil in the same way that Finland or Sweden was, their impact is still felt stronger there than, say, China. The reason for this is as much related to shipping as it is to the actual importation of oil for the purposes of driving cars and operating heavy machinery.
The shipping industry is actually the biggest user of oil of all industries by a pretty huge margin. This is why the sanction on Russia had such a far and wide impact; many industries would import equipment, materials, and goods from Europe. And when they did it, they would use cheap Russian oil.
If every barrel of Canadian oil was reliant on a quarter barrel of Russian oil in some way (whether by supplementing Canadian stockpiles or transporting the oil) then taking away that one fourth of a barrel will do a lot to undermine the industry’s ability to meet demand.
However, it does not actually affect the amount of supply these companies have to offer. Which results in an interesting situation: Canadian oil, like many industries, has taken a hit. But it might actually bounce back really well due to the increased demand for oil coming from basically all directions.
That would drive the value of Canadian currency way, way up. So, what we are looking at is one force that we know about (a lack of oil due to sanctions on Russia) and a force that we do not know about (the possibility for Canada to cover that lack of oil).
Foreign currency exchange is exactly where you’d bet one which one you expect would win out.
As it stands now, Canadian currency has seen an increase in price after the slump that followed the initial sanctions. This, combined with the recent economic turbulence within the United States, makes it the booming currency. It has yet to be seen whether or not it has reached the top of its value though.
6. USD/CNH – Best Chinese Currency
That is an odd superlative, isn’t it? Isn’t there just one Chinese currency? Surprisingly, no. CNH is the Chinese currency used abroad. It is the one you will find on any foreign currency trading platform.
The other Chinese currency is CNY, also known as Yuan. This is what is used internally in China by its citizens. But of course, if a few bills of Yuan slip over the border to other nations every so often (or slip over a few borders) then China will still accept them from foreign hands.
The Difficulty of Having Two Currencies
The issue with Yuan is its volume. This has an effect on the value of Yuan, but it is not the effect on its value that you are looking for when you are looking at the traded volume of a currency. What you are looking for is to use volume as a way of measuring what is about to happen with a currency.
Volume tells you two things: How much is being traded, as well as whether more is being bought or sold. With this information you can make a surprisingly informed opinion about whether a currency will get more or less expensive. The more people buying, the more valuable it is about to get.
And the less people buying, or the more people selling, the more likely it is that it is about to tank.
The issue with Yuan is that the lack of volume outside China means it is hard to predict where it is going and why. But with CNH, there is a much higher volume that makes it far easier to predict.
The Chinese economy is interesting for being so independent internally, while being so closely tied to the goods of almost every major nation externally. That means that if you have investments in industries that make use of Chinese labour, then you stand a good chance of predicting where CNH goes.
Conclusion 👀️
These six trades represent both the most common and the best of foreign currency trades. One of the many things that separates foreign currency from other forms of securities trading is that it is less a matter of finding diamonds in the rough. There are almost no “niche” currencies.
Whereas you can spend all day and night looking for the “next big thing” on the stock market, that skill will provide you little in foreign currency trading. The main skill of foreign currency trading is timing. Most people know what is going to happen. And most people can even tell you when it will happen.
But not everyone knows when any given world event will stop. Whether that means stop paying out or stop undermining the value of a currency makes no difference. If you have the means or knowledge to figure out that timing, then you can be rich. As long as you are willing to take some risks.
