Forex Trading - Which Currencies Should I Trade?

When a new trader begins foreign exchange trading, one thing he will be faced with is the large number of currency pairs that are actually traded on the FX. Depending on the broker he uses, he may see as many as 50+ currency pairs on his trading platform.

How do they differ? Does it make a difference which ones I trade? How do I choose the pair I will be trading? Following are some brief observations that I hope will be helpful to the beginning forex trader.

commonly traded or 'liquid' currency pairs are the currencies of countries with stable governments, respected central banks, and lower levels of inflation. Today, the vast majority of all daily currency trades include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar. Hence the major pairs are the following:

EUR/USD: Eurodollar/US Dollar
GBP/USD: British Pound/US Dollar
USD/CHF: US Dollar/Swiss Franc (CHF stands for Confoederatio Helvetica Franc)
USD/JPY: US Dollar/Japanese Yen
USD/CAD: US Dollar/Canadian Dollar
AUD/USD: Australian Dollar/US Dollar
It is important to know that the major differences in currency pairs are manifested in 2 ways:
1. Volatility of the currency
For this discussion, volatility can be simply defined as the amount of price movement, and the speed in which it moves given a stated time period. The more liquid the market, the less and slower it will move during a day.
Don't worry, there is plenty of movement and opportunity for profit in the major currencies, without your emotions going for a roller coaster ride while watching the other "minor currencies" fluctuate wildly! Stick with the major currencies until you have the experience and risk tolerance to trade the lesser, more "exotic" currencies available.
2. Bid/Ask spread difference
The difference in PIPS (the smallest increment a currency can move) between the price at which you buy a pair, and sell it, is called the "spread". You might see a price quote for the EUR/USD at 1.4527/1.4530. That quote denotes you pay a 3 PIP spread when you put on the trade. Some of the minor and "exotic" currencies will have spreads in the 10-50 PIP range or more! Needless to say, these are not the markets for the faint of heart or the beginning currency trader.
There are enough factors to hold the beginning trader's attention in online forex trading without worrying about the volatility and spread costs of trading minor currencies. Stick to the majors, and you will have a much better chance for success.
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