Forex trading has become one of the most popular forms of asset management. With the convenience of being able to trade on your personal devices, any time, anywhere, it has become a common choice for a side hustle. This was especially accentuated during the COVID-19 period when earning from home was a necessity.
Despite having a plethora of choices, traders often gravitate towards the same few currency pairs. This leads to a situation where different pairs are significantly different in daily trading volumes. The question is: why is that the case, and what makes a currency pair more popular than others?
There are many different reasons, and reputation is one of the most prominent ones. Remember back to when you first traded forex. You were probably introduced to a currency pair to start with. Or you did research on the best currency pairs for a beginner.
The person or a website that recommended your first pair did it from their experience of trading. Over time, certain currency pairs have gained different reputations for their evolved traits. For example, the most popular currency to be traded with – the US dollar, is known for being the safest and most stable. However, this is not true all the time.
Forex trading is impacted by the perception of the trader. If the general sentiment is confidence in a currency, it will likely surge. If traders don’t have trust, they will buy and sell frequently to earn quick profits, and the currency will be volatile.
It’s a spiraling effect; as traders become more confident in a currency, it is more stable, creating a reputation. From that reputation, traders will have even more trust. This can be observed through the statistics that 24% of all forex trades made in 2019 were from the EURUSD pair.
Like it or not, the hype has become one of the strongest forces that influence human decisions in the 21st century. When there is a hype around a currency pair, there will be FOMO which subsequently adds more supply and demand to the market. With the assistance of social media, trends can spread like wildfire overnight.
A similar psychological phenomenon to reputation can be applied to hype. Some hype products can be turned into a product with a reputation.
However, for the most part, the hype is an unsustainable way of making and keeping a currency pair popular. Most hypes die down quickly, even though some last longer, giving traders a false sense of security that it is here to stay.
Understanding if a currency pair has intrinsic value or whether it is a hyped-up scheme to earn profits by a group of people is one of the big lessons a beginner will need to learn.
Trade deals between countries
Apart from speculators, the forex market is made up of demand and supply from importers and exporters. This involves significant trade deals between countries. In order to import a product, a country needs to buy a foreign currency which increases the supply of their currency and demand for the other currency. The opposite effect happens when they become the exporter.
When more trade deals are made, there is more liquidity in the market. This keeps it nonvolatile and low risk.
Trade deals between countries are a big constituent to popularity because it is the ‘natural’ demand and supply. It gives it an extra push compared to other pairs that are not involved in trade deals with each other, and their markets are solely based on the decision of forex traders.
For example, the Turkish lira is almost non-existent to forex traders and is considered an exotic currency. However, recently, the pair EURTRY has gained traction and become more popular because Turkey has many trade deals with the EU due to their close geographical location.
Although not involved in the group of eight major currencies, China’s economy has been developing massively. They have trade deals with almost every country due to their low export prices. They are slowly challenging the United States for the world’s largest economy.
Since forex trading began, the US has always been the number one economy. However, things will change, and once there are economic shifts, we will see the effects translate into the forex market, as some currency pairs will gain popularity, replacing others.
One of the main factors that are holding the yuan back is the skepticism people have over the way the Chinese government operates. In terms of forex trading, their fixed exchange rate does not allow for variability in price. Therefore, traders do not see it as an investment worth their time.
Value in the market
Ultimately, all of the factors above boil down to the total number of participants in the market. If there is high liquidity, the currency pair will appear safer and generally attract more investors. This is the reason that the EU – as a single economy and the US, two of the world’s biggest economies, form some of the most stable and popular currency pairs.
Currency pairs are different in many ways. They vary by how much they are traded, what they are traded for, and also their popularity.
The popularity of a currency pair depends on its reputation, potential hype, international trade deals, and any political and/or economic changes.
It is important to identify which factors lead to popularity growth and which pairs are a bubble that will inevitably be pop once the market correction comes.