2023.11.02
2023.06.01 A Comprehensive Guide To Major Currency Pairs
Jana Kanehttps://www.litefinance.org/blog/authors/jana-kane/
A currency pair on the trading market is the main tool for forming an offer to buy or sell a currency. A currency pair consists of two currencies: the main currency and the quote currency. The most traded currency pairs are those that contain the dollar, as it is the largest economy in the world. Examples of such pairs are EUR/USD, GBR/USD, JPY/USD and so on. Of course, there are currency pairs that do not contain the dollar, they usually have smaller market volumes, and nevertheless, they are no worse for it. Pairs with a large market volume and a small market volume are called "major" and "minor". It is critically important for a trader to understand what the difference between these pairs is, and that’s what we will talk about in this article.
The article covers the following subjects:
- Major takeaways
- What Are the Forex Major Pairs?
- Understanding the Major Currency Pairs
- Why Traders Trade the Major Currency Pairs
- The Four Traditional Major Pairs
- Commodity Currencies
- Cross Currencies
- How are the prices of the major pairs determined?
- How do I trade the major forex pairs?
- How is a currency pair calculated?
- Forex market trends and trending currency pairs
- Example of a major pair price quote and fluctuation
- Major currency pairs FAQs
Major takeaways
Main Thesis | Insights and Key Points |
---|---|
Definition: | Major Currency Pairs are essential instruments in the Forex market, offering opportunities to trade and profit. |
Understanding the Major Currency Pairs | Grasping the concept of Major Currency Pairs is crucial for mastering trading skills and succeeding in Forex |
Why Traders Trade the Major Currency Pairs | Traders opt for Major Currency Pairs due to their liquidity, familiarity, and potential for significant returns |
Traditional Major Pairs: | Traditional Major Currency Pairs are foundational in Forex, representing the world's strongest economies. |
Commodity Currencies: | Major Currency Pairs often include commodity currencies, reflecting the economic strength of resource-rich nations. |
Cross Currencies: | Cross currencies exclude the USD but are still considered Major Currency Pairs due to their trading volume. |
How are the prices determined: | Prices of Major Currency Pairs are influenced by economic indicators, geopolitical events, and market sentiment. |
How to trade: | To trade Major Currency Pairs, one must understand market trends, utilize tools, and follow expert advice. |
How calculated: | Major Currency Pairs are calculated based on the relative value of one currency against another in the pair. |
Trends: | Major Currency Pairs often set the trend in the Forex market, guiding traders in their investment decisions. |
What Are the Forex Major Pairs?
Imagine a duo of global currencies, kind of like a dance partnership. This is what we call a 'currency pair'. You're probably already familiar with the popular kids on the block; those that usually have the US dollar and euro dollar as their dance partner. But did you know, there are also some less famous, but equally intriguing, currency pairs? These tend to shy away from the limelight and don't necessarily involve the US dollar.
These understated pairs are often referred to as 'cross' or 'minor' pairs. Although they're not the talk of the town, they hold a great potential for trading. It's just that they might not be on everyone's radar as they're not in the usual trading limelight. But hey, don't let that dissuade you!
To give you an idea, pairs like EUR/CHF (Euro and Swiss Franc), EUR/NOK (Euro and Norwegian Krone), and GBP/EUR (British Pound and Euro) are examples of these minor forex pairs. Notice something? Yep, they do not have the mighty US dollar in their mix. They might be less frequently used as trading instruments, but remember, in the world of forex traders, it's often the hidden gems that shine the brightest!
List of the Major Currency Pairs
Seven the most popular currency pairs:
EUR/USD;
USD/JPY;
GBP/USD;
USD/CHF;
AUD/USD;
USD/CAD;
NZD/USD.
The last three pairs from the list also function as commodity pairs, so sometimes they are excluded from the list of currency pairs.
Understanding the Major Currency Pairs
When you make a trade, you are simultaneously buying one currency and selling another. You buy the currency that is the first in the pair, it is also the base currency, and you sell the one that is the second in the pair - this is the quote currency.
The price of a currency, as well as the actual profitability of trading at one time or another, depends on the state of the economy of the currency country. It is of great importance what the economy of a particular country is based on. If the economy is mainly based on oil, then analyzing the oil market, you can see how the currency of this country behaves. This is a simple example, of course it is also necessary to take into account GDP, interest rates, economic growth (or recession). All these factors affect the price of a currency relative to other currencies.
If you have ever studied the forex market, then you have probably already met the term "major currency pairs". This term refers to several pairs that account for about 75% of forex trading volumes. The fact is that these pairs are so popular because of the developed and stable economies of the countries to which they belong. As you might have guessed, among these currency pairs, there will be such currencies as USD, EUR, JPY, GBP, CHF. But there are only 4 main currency pairs: EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Why Traders Trade the Major Currency Pairs
The answer is simple: major pairs have a smaller spread, they attract more traders and therefore increase trading volumes. When trading volumes increase, it is easier to enter and exit the market. Major pairs are more stable and liquid currency pairs.
In this case, smaller pairs are less attractive because small trading volumes increase the likelihood of slippage. As each transaction can have a large impact on the exchange rate, there is risk involved.
The Four Traditional Major Pairs
Different experts have different opinions. Some believe that there are only four major pairs.
EUR/USD
To minimise risk when trading the EUR/USD pair, wait for the European and American markets to open and settle before trading. For day traders, the most efficient and active market is between 13:00 and 16:00 GMT.
USD/JPY
The perfect time for trading is from 12pm to 8pm GMT during the American trading session or from 11pm to 8am during the Asian trading session.
GBP/USD
It's better to do international trade not from 6 am to 4 pm GMT. For maximum efficiency and potential profits, the sweet spots are between 8 am to 10 am and from noon to 3 pm GMT.
USD/CHF
The best time trade is between 2 am and 5 am, and between 8:30 am to 10 am. These periods align with the economic release schedules of both countries, making them suitable for active trading.
Commodity Currencies
Commodity currencies are unique in Forex trading because their prices are closely tied to global commodity prices. This happens when a country is heavily dependent on the export of certain commodities, making its currency more sensitive to any price changes in the commodity markets.
Commonly traded currencies include the New Zealand dollar, Australian dollar, Canadian dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble and Chilean peso.
AUD/USD
In order to optimise your fx trading efforts, it is advisable to trade this different currency and foreign exchange market between the hours of 19:00 and 4:30 GMT.
USD/CAD
When it comes to trading these currencies, it's important to note that the entire North American trading session begins at 12pm GMT and gracefully bows out at 8pm GMT.
NZD/USD
The best time to trade this pair is from midnight to 2:00am, 6:00am to 8:00am and noon to 5:00pm GMT.
Cross Currencies
As mentioned above, cross-currency and trading and cross currency pairs often have interest rates that do not include the dollar. Most cross currency trading and pairs may include the Euro or the Japanese Yen.
GBP/EUR
The best time to trade this pair is from 7am to 4pm GMT.
EUR/CHF
This pair is heavily influenced by market announcements, but the best time to trade is from 8am to 4pm GMT.
EUR/JPY
The ideal time to trade this pair is from 13:30 to 20:30 GMT.
How are the prices of the major pairs determined?
One of the basic concepts to grasp in this area is that currency pair prices are categorised into two distinct values - the bid (or buy) price and the ask (or sell) price. These values serve as the basis for determining the overall value of a currency pair.
More specifically, the strength or weakness of the base currency in relation to the cross currency is the primary determinant of the value of the currency pair. It's a complex but fascinating web of financial interactions that determines the ebb and flow of the market.
How do I trade the major forex pairs?
Trading currency pairs can be a complicated and nuanced process, but we're here to make it a breeze.
If you're ready to start trading a particular pair, follow these simple steps to get started:
First, open an account with us and deposit the funds required to start trading.
Next, select the currency pair you'd like to learn more about.
Conduct a thorough analysis of both the technical and fundamental aspects of the currency pair to gain meaningful insights.
Select the ideal forex strategy for you and carefully evaluate the risks involved. Once you have a clear plan of attack, it's time to make your move and open a buy or sell position in the market.
How is a currency pair calculated?
Let's take the GBP/JPY currency pair for example. Its current rate is 137.02, which means that one British pound is worth 137.02 Japanese yen.
Now let's examine the key parameters that every trader needs to understand when trading any major currency pair.
Pip price
In the Forex market, a pip is the minimum price difference for a two traded currency pair each, usually limited to ten thousandths of a unit. For example, for a trader trading 1 lot of GBP/JPY, the cost per pip is $0.8392.
The value of the pip is derived by dividing 0.0001 by the current rate (1.3702) and multiplying by the volume of the trade (100,000 units). So 0.0001/1.3702*100000= $0.8392.
Collateral and Leverage
Leverage is an essential tool that allows traders to increase their trading volume by borrowing funds from brokers, while collateral refers to the minimum amount required to maintain a position.
Suppose a trader wants to initiate a 1 lot GBP/JPY trade. In this case, they'll need around $137,020 in collateral. However, minimising the margin by increasing the leverage ratio to 1:200 could reduce the required collateral to just $685.1.
Position Size
Position size measures the volume of a trade based on the number of lots purchased. One lot is equal to 100,000 units of the base currency used. The basic rule of thumb is to risk no more than 2% of the account equity.
For example, a trader with an account equity of $10,000 may wish to risk 100 pips on the GBP/JPY. Therefore, the maximum position size allowed in this context would be 0.15 lots.
Forex market trends and trending currency pairs
First of all, let's have a clear understanding of what a trend is. A forex trend is a consistent direction in the price of an asset over a period of time, characterised by a clear intensity and frequent updates of local highs and lows.
Let's look at the three main types of trends that occur in the market:
An uptrend, also known as a bullish trend, is characterised by rising price trends and continues as each successive high outperforms its predecessor.
A downtrend, or bearish trend, is a falling price with repeated lows. Prices fall below previous lows when an asset is in a downtrend.
A sideways or flat trend occurs when the price of an asset is not moving in a definite direction. It is the most common market condition observed in Forex trading.
It's important to note that a trend will continue until there is a signal to end it. For example, in a bullish market, the price may stop rising above the previous high, signalling a possible bearish trend.
EUR/USD
The most popular and quite volatile pair in Forex. The Fed and ECB minutes, which are publicly available, help to monitor the exchange rate of these currencies.
USD/CAD
This pair is also considered to be quite liquid and volatile (on average 80-100 pips). However, the behaviour of the CAD can be easily predicted based on data from the precious metals and oil markets, as this is the strongest side of the Canadian economy.
AUD/USD
The AUD/USD has powerful, enduring trends. Australia's abundant mineral and agricultural exports influence its rate, while the economies of China and Japan also influence this pair.
GBP/JPY
Traders like GBP/JPY, although its average volatility of 110 pips and complexity may deter amateurs. Economic conditions in the UK and EU, Japan's monetary policy and interest rate differentials make GBP/JPY suitable for the carry trade strategy. Data on GDP, unemployment, inflation and industrial production are influential.
Example of a major pair price quote and fluctuation
Let's consider the USD/JPY exchange rate, which may currently be at, say, 139, meaning that one US dollar buys 139 yen. If the rate moves to 140.5, it means that the US dollar has appreciated and the same amount of dollars will buy more yen. Conversely, if the rate moves to 137, it will cost more US dollars to buy one yen, meaning that the US dollar has weakened or the yen has appreciated.
Major currency pairs FAQs
The 7 major currency pairs all include the dollar. Here they are: EUR/USD,USD/JPY,GBP/USD,USD/CHF,AUD/USD,USD/CAD, andNZD/USD.
The two currency trading pair consists of the base currency and the quote currency. The base currency comes first, you trade it against the quote trade currency pairs.
Pairs that include USD, EUR and JPY. Trading in these currencies accounts for around 70% of all Forex trading.
The difference between the bid and offer price is known as the spread, which is essentially a fee charged by brokers for each transaction. Choosing smaller spreads can lead to higher profits. Among the currency pairs listed below, the ones with the lowest spreads are EUR/USD, USD/JPY, AUD/USD, USD/CHF and NZD/USD.
USD, EUR, JPY and GBP.
EUR/USD is considered the safest due to the strongest economies in America and Europe and the huge market volume.
EUR/USD, GBP/USD, USD/CHF, USD/CAD and USD/JPY are probably the easiest currency pairs to trade.
Currency pairs set the value of one currency in relation to another. Exchange rates fluctuate, allowing traders to profit by buying or selling.
Currency pairs are used to make an offer to exchange one currency for another. With skilled speculation you can make a profit.
They can be divided into three main types - majors, minors and exotics.
Currency pairs refer to the relative value of one currency against another in Forex trading.
Some of the most volatile currency pairs include GBP/NZD, GBP/AUD, GBP/CAD, GBP/JPY, EUR/NZD, EUR/CAD, EUR/AUD and EUR/JPY.
For example, in the EUR/USD pair, the Euro is the base currency and the US dollar is the quoted currency. The quote currency tells you how many units of that currency it takes to buy one unit of the base currency.
You can trade currencies on the global Forex market through online trading platforms such as LiteFinance. The platform allows you to trade the major currencies, crosses and exotic forex pairs with high liquidity.
It's worth noting that the LiteFinance online platform offers various options such as high liquidity majors consisting of EUR/USD,USDJPY,AUDUSD and others. They also offer crosses such exotic currency pairs such as GBP/JPY,EUR/GBP and exotic pairs such as USD/TRY,USD/MXN.
Currently the cheapest currency in the world is the Venezuelan Bolívar.
Choosing two pairs that are moving in different directions would be a better option to start with.
Experts recommend trading currency pairs such as USD to EUR, USD to JPY, USD to CAD, GBP to USD, USD to CHF and AUD to USD.
There is no definitive answer to choosing the most successful forex trading strategy. It depends very much on the trader's personality, goals, budget and knowledge. Scalping, day trading and swing trading are often considered to be the most profitable strategies in the forex market.
Night trading in Forex depends on your geographical location as there are significant time differences between Asia, Europe and North America. However, some currency pairs, such as the Japanese Yen and the New Zealand Dollar, may have lower margin requirements at night.
It is possible to make money by exchanging currencies, but the prices of the foreign exchange and currencies can rise and fall at any time. You must therefore be vigilant when you trading major currency pairs.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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