The foreign exchange or Forex market is the largest and most liquid financial market in the world, where currencies are traded in pairs and brokers use sophisticated liquidity aggregation solutions to provide traders with the best prices.
FX trading is about analyzing and tracking various currency pairs. Some currencies are highly liquid and robust, supported by substantial trading volumes, while others may lack demand, resulting in lower value when paired with stronger currencies. Currency pairs are categorized into different groups based on factors such as demand, volatility, liquidity, and their overall importance in the market.
This article explains what Forex majors and minors are, their significance, and how to select the best trading pairs to enhance your trading success.
What Are Forex Majors and Minors?
Forex majors
Forex majors are currency pairs that include the most widely traded currencies in the market. They typically involve the U.S. dollar (USD) and one other major currency. The majors are highly liquid, meaning they have a high trading volume and tight bid-ask spreads, which often translates to lower transaction costs and greater trading opportunities.
The currencies in question are typically backed by solid and stable economies, which results in lower levels of volatility when compared to lesser-known or less stable currency pairs.
The most commonly traded Forex majors include:
- EUR/USD (Euro/US Dollar)is the most traded currency pair in the world. It represents the two largest economies, the Eurozone and the U.S., and is known for its liquidity and tight spreads.
- USD/JPY (US Dollar/Japanese Yen)is another highly traded pair that reflects the relationship between the world’s largest and third-largest economies. It is popular for its volatility and liquidity.
- GBP/USD (British Pound/US Dollar)is known as “Cable,” this pair represents the economic relationship between the U.K. and the U.S. It is favored for its liquidity and relatively high volatility.
- USD/CHF (US Dollar/Swiss Franc)is often considered a safe-haven currency pair, with the Swiss Franc traditionally seen as a stable currency.
- USD/CAD (US Dollar/Canadian Dollar)reflects the economic relationship between the U.S. and Canada. It is influenced by commodity prices, particularly oil.
- AUD/USD (Australian Dollar/US Dollar)represents the trade relationship between Australia and the U.S., with movements often driven by commodity prices and global economic data.
Forex minors
Forex minors, or cross-currency pairs, do not include the U.S. dollar. Instead, they involve other major currencies, and their liquidity and volatility can vary depending on the pair.
Minor currency pairs typically have wider spreads than major pairs because they have lower trading volumes. This means that the cost of trading minor currency pairs can be higher due to the wider difference between the buying (ask) and selling (bid) prices. As a result, traders may need to consider the impact of wider spreads when trading minor currency pairs.
Some well-known minor pairs include:
EUR/GBP (Euro/British Pound) reflects the economic relationship between the Eurozone and the U.K. It is influenced by economic data and political developments in both regions.
EUR/JPY (Euro/Japanese Yen) combines the Euro with the Japanese Yen, offering opportunities based on economic conditions in Europe and Japan.
GBP/JPY (British Pound/Japanese Yen) is known for its high volatility, this pair is influenced by factors affecting both the U.K. and Japan’s economies.
AUD/JPY (Australian Dollar/Japanese Yen) is influenced by commodity prices, global risk sentiment, and economic data from Australia and Japan.
NZD/JPY (New Zealand Dollar/Japanese Yen) represents the trade relationship between New Zealand and Japan, with movements influenced by commodity prices and economic data from both countries.
Factors to Consider When Choosing Trading Pairs
Liquidity
Major pairs generally offer higher liquidity, meaning they have higher trading volumes and tighter spreads. This often results in lower transaction costs and easier trade execution. Minors may have less liquidity, which can lead to higher spreads and potential slippage.
Volatility
The level of volatility can impact your trading strategy. Majors like EUR/USD and USD/JPY tend to have lower volatility compared to some minor pairs. If you prefer more stable markets, majors might be more suitable. For those seeking higher risk and reward, minors might offer more opportunities.
Economic indicators
Pay attention to economic indicators and news releases from the countries involved in the currency pairs. For example, interest rate decisions, employment reports, and inflation data can significantly impact currency prices.
Correlation
Understand how different currency pairs are correlated. For instance, EUR/USD and USD/CHF are negatively correlated, meaning when one moves up, the other often moves down. This knowledge can help in managing risk and diversifying your trading strategy.
Trading hours
The Forex market operates 24 hours a day, but liquidity can vary depending on the time of day. Major pairs tend to have higher liquidity during the overlapping hours of major financial centers, such as London and New York. Minors might be less liquid outside these hours.
Economic and political stability
Consider the economic and political stability of the countries involved in the currency pairs. Political instability or economic uncertainty can lead to increased volatility and impact your trading decisions.
Strategies for Trading Forex Pairs
Trend following
Identify the overall trend of a currency pair and trade in the direction of that trend. For example, if EUR/USD is in an uptrend, you might look for buying opportunities.
Range trading
When a currency pair is trading within a defined range, consider buying at the support level and selling at the resistance level. This strategy works well in markets without a clear trend.
News trading
Capitalize on market-moving news and economic data releases. Major pairs often react more predictably to news events, making them suitable for news trading strategies.
Carry trading
This strategy involves borrowing in a currency with a low interest rate and investing in a currency with a higher interest rate. It’s more common with major pairs but can be applied to minors as well.
Technical analysis
Use technical indicators, charts, and patterns to inform your trading decisions. This can help identify entry and exit points for both major and minor pairs.
