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Traders have the luxury of highly leveraged trading with lower margin requirements than equity markets. But before you jump in head first to the fast-paced world of forex trading, you'll need to know the currency pairs that traders trade most often. Here's a look at six of the most tradable currency pairs in forex.
The EUR/USD currency pair tends to have a negative correlation with USD/CHF and a positive correlation with the GBP/USD (more on these currency pairs later on). This is due to the positive correlation of the euro, the British pound and the Swiss franc. (To learn why the EUR/USD currency pair, see Why isn't the EUR/USD currency pair quoted as USD/EUR?)
USD/JPY: The "Gopher"
The next most actively traded pair has traditionally been the USD/JPY pair. This pair has been sensitive to political sentiment between the United States and the Far East. The pair tends to be positively correlated to the USD/CHF and USD/CAD currency pairs due to the U.S. dollar being the base currency in all three pairs.
GBP/USD: Trading The "Cable"
The GBP/USD pair tends to have a negative correlation with the USD/CHF and a positive correlation to the EUR/USD. This is due to the positive correlation between the pound, euro and the Swiss franc. (To learn more, read Forex: Making Sense Of The Euro/Swiss Franc Relationship.)
USD/CHF: Trading The "Swissie"
The USD/CHF currency pair tends to have a negative correlation with the EUR/USD and GBP/USD pairs. This is due to the strong positive correlation between the Swiss franc, pound and euro. The franc has long been thought of as a safe haven for forex traders in times of political unrest. (To learn more, read A Primer On The Forex Market.)
AUD/USD: Trading The "Aussie"
The AUD/USD currency pair tends to have a negative correlation with the USD/CAD, USD/CHF and USD/JPY pairs due to the U.S. dollar being the quote currency. As well, the correlation with the USD/CAD is also due to the fact that both the Canadian and Australian dollars share a positive correlation with each another as both currencies are commodity block currencies.