It’s better to select select-few currency pairs to watch closely daily. One way to filter out so many options is by only focusing on the most predictable currency pairs.
The spiel for the forex market is how many opportunities there are to make profits.
But there are so many pairs to choose from at the same time, this can be distracting.
A pair is “predictable” when it plays along with the rule book of technical analysis to a tee.
Over and above that, five of the most predictable currency pairs will be listed after a brief recap of the basics of forex pairs.
There are different currencies peculiar to each country in the world. Only a handful of these currencies are accepted on a global scale.
Some of them are Euro, Japanese yen, Pounds, Australian dollar, Swiss franc, etc. To no surprise, the most traded currency is the US dollar.
The strength/ value of the major currencies is compared against one another and is called currency pairs.
Different can be used to view the strengths of these currencies against the other. These days, forex traders adopt Japanese candlestick charts to guide speculation. Also, analysts can determine a nation’s economic strength/ growth.
For instance, the GBP/USD currency pair sets the Great Britain Pound against the US dollar. At the same time, the GBP/JPY pair sets the Great Britain Pound against the Japanese Yen.
Types of Currency Pairs
- Major currency pairs: Major currency pairs contain the American dollar as the base or quote currency, e.g., USD/CAD. Most of the liquidity in the foreign exchange market goes into these pairs.
- Minor currency pairs: minor currency pairs contain any two currencies from the majors except the US dollar. Some of the instances are; CADJPY, GBPCHF, etc.
- Exotics pairs involve currencies of nations whose economies are growing alongside a significant currency. An example is an American dollar against the Mexican peso.
In forex, currency pairs can be divided into portions; the base currency and the counter currency.
Base Currency and Counter Currency
The base currency is the first currency listed in any given pair, while the counter currency is the other currency that follows.
When you long a currency pair, the base currency is bought and the counter currency is sold. Therefore, the base currency is expected to appreciate with respect to the counter currency.
Contrarily, a short order means the counter currency is expected to strengthen against the base currency.
Note: the counter currency can also be regarded as quote currency by some traders.
What Determines the Predictability of a Currency Pair?
Various types of analysis are done to determine the future pricing of currency pairs.
From a technical analysis point of view, some pairs tend to adhere to analysis better than others.
Therefore, these pairs are referred to as the most predictable currency pairs.
Further, the major currency pairs are the most predictable because of the high volume traded.
Also, they aren’t volatile, leading to more stable pricing/range-bound price action. This is a major difference between forex and crypto, as currency pairs are more stable when compared with cryptocurrencies.
So, low-volatility pairs tend to be way easier to analyze as price movements aren’t aggressive.
The Most Predictable Currency Pairs
In nearly every ranking for the most predictable currency pair, AUD/USD is up there. This is subject to how clear trends are defined on this pair.
In addition, a lot of times, patterns tend to repeat themselves over and over. Both candlestick patterns and classical chart patterns are appropriately respected.
EUR/GBP isn’t very volatile, so many people don’t trade it as it only moves a small number of pips daily.
On top of that, the United Kingdom and Europe have favorable policies for both parties. This results in very few spikes in price with a limited trading range.
The NZD/USD is also called ‘kiwi’ by some forex traders for short. Among the XXX/USD pairs, it delivers the best market structure, only rivaled by GBP/USD.
In the last quarter of 2021, the breakouts and trends on this pair were crispy clean. It’s at the top of every trader’s watchlist at the time.
The Swiss franc is one of the most stable currencies, and it’s viewed by many as a haven. This stability influences the currency pair making it predictable.
Besides, trading ranges are well-defined and maintained for prolonged periods, making trade easy.
The USD/CAD pair comprises the American dollar against the Canadian dollar, and it’s called ‘loonie’ for short.
What’s more, this pair correlates to the dollar index (DXY), which gauges the strength of the US dollar. Therefore, traders use analysis of the DXY to predict this pair’s direction.
What are the most correlated currency pairs?
In forex, for a few reasons, some currency pairs move in the same or opposite direction simultaneously.
This phenomenon is known as currency correlation, and it’s pretty common. Two currency pairs are positively correlated when they move in the same direction. On the contrary, two currency pairs are negatively correlated when they tend to oppose each other at the same given time.
The most positively correlated pair has to be the EUR/USD and GBP/USD. Likewise, the AUD/USD and NZD/USD come in a close second.
Correlation is a very important tool in analyzing currency pairs. In a situation where two pairs positively correlate, one of the two pairs will have better and clearer price action.
This goes on to improve trading decisions because a better perspective is gotten.
All the major currency pairs in forex are relatively stable, but the EUR/USD stands out the most. It contains the currency of two of the largest economies globally, meaning the value of each currency is quite close.
Additionally, EUR/USD is the most traded currency pair, accounting for 24% of trades daily.
The volatility of a currency pair is a measure of how frequently the price of the pair in question changes. A volatile pair will experience large surges in price quickly. So, the more stable the price of a currency pair is over a given time, the less volatile it is.
Undisputedly, the XAU/USD pair representing physical gold against the US dollar is the most volatile. While trading this pair, large spikes and long wicks are expected.
Summary: Most Predictable Currency Pairs
Generally, technical analysis is a means to make as many probable decisions as much as possible. Every factor that could give an edge in profit-making must be considered.
This goes on to affect the type of currency pairs traded too. Streamline your watchlist to only pairs with terrific price action.
Moreover, they are more predictable, and you’d find that they are easier to trade and have an extra edge over the markets is gotten.