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One of the advantages of Forex trading is that this form of speculation with a certain background knowledge is also suitable for beginners. Nevertheless, one should first act cautiously and inform oneself in detail about the customs and market conditions. This also includes that beginners in Forex trading deal with which currency pairs they want to speculate on at all. In this regard, it is important to know that the market is divided into different groups. We would therefore like to inform you in the following which currencies or currency pairs are particularly suitable for beginners and with which currency pairs it is rather the professionals who should act.
Forex market works on the basis of currency pairs
If you have not yet studied forex trading, you may not know how trading works and what the forex market is based on. As a matter of fact, most Forex trading involves trading individual currencies, but this is not quite correct in its form. Every trade you make through the Forex broker’s trading platform automatically contains two currencies. So you never trade just one currency, but a currency pair, which accordingly consists of two currencies. The currency pair has the task of representing the value relationship between the two currencies involved. So if you are convinced that the dollar exchange rate will rise in the near future, you will have to decide in the second step against which currency this should be the case. It is quite possible that the dollar will increase in value against the euro, but will depreciate against the pound sterling. For this very reason, it is important that when trading currency pairs, you always keep both currencies involved in the currency pair in mind.
What groups are currency pairs divided into?
There are now over 50 currencies in the market, which can be traded freely, without any regulations or restrictions. As a result, there are over 200 currency pairs that you can trade. Therefore, it makes sense to divide these currency pairs into different groups.
Although there is no uniform regulation in this regard, in practice it has been shown that the vast majority of all tradable currencies or currency pairs can be assigned to one of the following three groups:
- Standard Currencies
- currencies still readily tradable
- exotic currencies
The best known is certainly the group of standard currencies, sometimes referred to as world currencies. The great influence these currencies and currency pairs have on foreign exchange trading is demonstrated by the fact that over 85 percent of all transactions in the foreign exchange market are based on the five standard currencies listed below:
- US dollar
- Swiss franc
- Japanese yen
In the second group are mainly those currencies that are still easily tradable on the one hand, but by no means generate the importance and trading turnover that is the case with standard currencies. The following currencies, for example, can be placed in this group:
- Swedish krona
- Norwegian kroner
- Danish kroner
- Russian Rube
- Indian rupee
- Yuan (Chinese currency)
For these currencies and, of course, for currency pairs where one component consists of the standard currencies and the other component of the currencies from the group of well-traded currencies, you can assume that a given trade order can be executed within a short period of time due to liquidity available in the market. However, this does not apply to the so-called exotic currencies, which represent the third group of currencies that can be traded on the market. The term exotic is used because, although these currencies are not necessarily unknown, they are of very little importance in the foreign exchange market and only have a small share of the total market in terms of volume. We will explain in more detail in one of the following sections why these more exotic currencies in particular are absolutely unsuitable for beginners.
The group of exotic currencies includes in particular those currencies that are used in countries that are only of minor importance on the foreign exchange market. These include numerous currencies from African or South American countries, for example:
- Argentine Peso
- Brazilian real
- Algerian dinar
- Dalasi (Gambia)
- Kwacha (Malawi)
Especially suitable for beginners: the standard currencies
Now that you know which groups the currencies and currency pairs involved in forex trading are classified into, you may now ask yourself which currencies you should choose as a beginner and why these currency pairs are particularly suitable. In fact, almost all experts agree that the standard currency pairs are much more suitable for beginners than, for example, the exotic currencies. This is mainly due to the fact that these currencies have a certain stability, although the respective exchange rates can of course fluctuate by several percent within a day. In addition, the performance of the standard currencies can be assessed much better than is the case with, for example, more exotic currencies from Africa. In Africa, the value of a currency can fluctuate by 20 or more percent in a single day. That’s why we have listed the most suitable forex pairs for beginners below.
Top 8 forex pairs for beginners:
With these currency pairs, a big advantage is that there is always sufficient liquidity in the market. It will practically never happen, for example, that you want to buy the dollar against the euro, but that due to a lack of supply or demand no rate will be established. The only exception is that you have set a limit on the order, which is relatively far from the current rate. Otherwise, you can be almost 100% sure that an unlimited order with the standard currency pairs will be executed immediately.
EUR/USD is by far the most traded currency pair:
Another point that is very important and clearly speaks for the standard currencies is the influence of individual orders on the price. In order for the exchange rate of a standard currency pair to change noticeably, there must be a large number of orders or individual orders with above-average volume in order for a noticeable price change to occur at all. It is therefore not easy to influence the prices of standard currencies in one direction or another. Of course, this provides a certain protection, especially for beginners, which is almost non-existent with the more exotic currencies.
Well-tradable and exotic currencies: primarily suitable for professionals
Both the still well tradable currencies, such as Swedish or Norwegian crowns, and the exotic currencies are less suitable for Forex beginners, but are reserved especially for the experienced professionals. Although this is only partly true for the still well tradable currencies, it applies in full to the exotic currencies. The problem for beginners with the well-tradable currencies is that there is usually sufficient liquidity in the market so that trading orders are executed immediately. However, with currencies in this group, it is important to obtain much more information. While you will be informed in detail in the daily news for currencies such as the euro or the US dollar, for other currencies, such as Norwegian or Danish kroner, you will have to take action yourself and inform yourself in the market. Mainly for this reason, the still well tradable currency pairs are especially suitable for experienced traders, because they know where to get what information in the market and can then assess the situation correctly.
While it is possible to discuss whether the still well tradable currencies are also suitable for beginners in Forex trading, the opinion about the exotic currency pairs is very clear. Even if one part of the currency pair consists of a standard currency, beginners should always distance themselves from this currency pair if the second part consists of an exotic currency.
There are essentially the following reasons why so-called exotic currencies are not suitable for beginners:
- sufficient liquidity in the market is not guaranteed
- Information on the currency is difficult and time-consuming to obtain
- even small order volumes can have a massive impact on prices
While the lack of liquidity is still considered by experts to be rather harmless, since under this condition an order is “only” not executed, the third point listed above in particular represents a real danger for beginners. In the case of exotic currencies – especially if they are part of a currency pair in which two rarely traded currencies are against each other – there is a great danger that even small order volumes can have a massive impact on the price. What does this mean? For example, if you trade $100,000 using leverage through a CFD broker, this is unlikely to change the price of the US dollar against the euro. However, if instead you were to place an order for 100,000 Algerian dinars, this could cause massive price changes.
The main danger for you is therefore that you may have bought an exotic currency a few days ago, for example, after you have informed yourself sufficiently and therefore come to the conclusion that a price increase is likely in the near future. Then, however, there is a slightly larger sell order in the market, which causes the price of this currency to fall massively. If this happens even while you still have an open order that has no limit, it can cause significant financial damage and losses. For this reason, only those traders who are experienced in trading exotic currencies and who are able to correctly assess the aforementioned risk should actually trade in these currencies.
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