Among the most popular currency pairs, there are seven that are classified as major pairs in forex. We put two currencies against each other to form a pair and how we speculate on the change of their value largely determines their volatility. When trading the Majors, both the pros and cons have to be taken into account.
In Forex, we have the big boys called the majors and the little fellows called the minors. All of them are being traded, but some are more popular than others. That’s where the distinction comes in play. However, before directing our attention toward the major forex pairs, let’s first focus on what a currency pair actually is.
Traders speculate on the price changes of a financial instrument, but forex traders speculate on the foreign exchange market.
Trading, in general, can be done with any asset, be that shares or commodities. In forex trading, however, we speculate on a currency’s value relative to that of another currency. Grouping the two together and valuing them against each other makes them a currency pair.
The 7 major pairs
Forex trading is all about understanding the interrelations between pairs and the currencies forming them. This is why the major pairs have as much influence as they do. The USD alone accounts for 90% of the global forex transactions, making it the current global currency. Here are the pairs themselves, where 6 out 7 include the USD.
- EUR/USD – Euro against US dollar
- GBP/USD – British pound against US dollar
- USD/CAD – US dollar against Canadian dollar
- USD/CHF – US dollar against Swiss franc
- USD/JPY – US dollar against Japanese yen
- AUD/USD – Australian dollar against US dollar
- NZD/USD – New Zealand dollar against US dollar
Trading on margin means that timing is crucial, and for the Majors this remains the case as well. Forex markets are open five days a week, 24 hours a day. Due to the varying time frames, it is easy to extend that and get almost a whole week. However, no one can be up that long, and that’s where automated trading comes along. A trader’s best tool are his wits, and so consistently working to work out different methods of improving one’s strategy can lead to some failures, but it can also result in a wider range of applications when enough experience is accumulated.
Liquidity & volatility
On paper, everything can move a currency pair’s price. In practice, it is those items tied to the use of massive amounts of currencies that generally effect price fluctuation. Such can be commodities or natural resources that are exported in large quantities.
For instance, as soon as the oil price changes, a portion of the market jumps up or plunges down. Such was the case with the Canadian Loonie, when in 2015, the Governor of the Bank of Canada Stephen Poloz predicted the country’s economy would manage to make a turn for good and recover after many years of low oil prices.
However, understanding the correlation between currency pairs can be just as powerful. There is negative, positive, and random correlation. A negative correlation means one currency’s value increases as the other decreases. Conversely, a positive correlation means that the two currencies go hand in hand both up and down. Random movement is just as unpredictable as it sounds, though, with the proper knowledge, that may not always be the case.
Pros and cons
Clear definitions of good or bad cannot be made without acknowledging that both are but a side of the same coin. Major pairs are popular and that’s great for business, but it’s also the reason why trading them is associated with higher risk as well. News comes in easily and regular economic updates put on display the underlying economies on a daily basis. Those who follow the market know that opportunities can be found more easily that way. But they are also aware of the fact that great amounts of time and work have to be put in so that there is reasonable gain.
Along with the traditional liquidity that comes with news, there are transaction costs that also go down when trading volumes increase. Liquidity and volatility, as noted above, are tightly connected to each other. Market sentiment can be a major driving force when a currency pair is in demand, as is the case with the top 7 pairs. As such, risk management becomes essential to minimizing the amount of losses and optimizing one’s strategy for consistent gains.
Successful traders are not those who make the most in one go but those who manage to adapt and build a portfolio that shows their competency in reading the markets and making use of price movements. To be one of them, patience and knowledge are key. Learning with Eightcap can provide you with educational materials that could become the material needed to forge your key to trading major forex pairs.
