Today we are going to be looking at Understanding the Major Currency Pairs in the forex trading markets.
If you want to become a better Forex trader, you must learn and understand a few things about currency pairs. Luckily handling the basics of this subject is relatively easy and the way in which currencies are quoted works the same for all currency pairs.
The most popular traded currency pairs are known as the major pairs. But before we look at which are the major forex currencies, we need to understand what a currency pair actually is.
All financial traders basically look to profit by speculating on the changing value of an instrument, such as the share price of a company, or the worth of a particular commodity.
The difference with Forex trading is that you are speculating on the value of one currency and it’s relative value to another. When you have two currencies involved which are grouped and valued against one an other, they known as a currency pair.
This relative value of the pair is expressed as how many units the first currency is worth in relation to the second currency.
So for example if the US dollar is being valued against the Japanese Yen, and the exchange rate was 110.00, it would mean that one dollar was worth 110.00 yen, simple enough. You can gain some valuable experience and gain more understanding by opening a demo account a with your selected broker and physically placing some trades with different currency pairs to experiment. Of course this is the safest way to do things as you are trading virtual money in real market conditions so it poses no risk you you.
Let’s look at some examples now to help us learn how to read currency pairs:
On our trading platform here we have a variety of differ currency pairs listed that are available to trade. Every currency has a three-letter ISO which stands for International Organisation for Standardisation and it’s the symbol assigned to the currency.
We have the:
- JPY which is the Japanese Yen
- GBP which is the British Pound
- USD which is the US Dollar
- CHF which is the Swiss Franc
Now, if we believe fundamentally speaking that the euro for instance is going to weaken due to low inflation and there is a chance of looser monetary policy from the European Central Bank (ECB). We could look to pit the Euro against another currency that we believe to be potentially strong in order to achieve the most from the market movement.
While you are researching potential currency pairings you speculate that the U.S dollar may strengthen due to the federal reserve tightening their monetary policy in response to the European Central Banks decisions and news releases. Based on this fundamental analysis you would likely look to trade the EURUSD.
As we think that the EURO will be weak we are looking to sell EURO pairs and as we think that the USD will be strong we will be looking to buy the dollar.
as already stipulated a currency pair expresses how much one currency is worth relative to its paired counterpart.
so in the price quoted for the EUR/USD currency pair its the number of dollars per Euro. If our analysis is correct and the Euro weakens, one Euro will be worth less in US dollars and subsequently the exchange rate will have gone down. We sold you the EUR/USD based on our analysis with the hope that the rate goes down.
I’m regard to Forex Quotes in currency pairs. We sell if we think an exchange rate will go drop lower, and we buy it if we expect it to rise.
in the list of currency pairs you may notice that the Euro was quoted first against the US dollar, but second when as part of a currency pair with the British pound.
Technically either currency could come first which would invert the rate of reversed but in forex there are commonly used conventions that order currency pairs in a particular format. the US dollar predominantly comes first in most pairs, with the exception of when it is quoted against the pound or euro.
Now The Forex market has the highest liquidity in the world, however only a handful of currencies make up this vast amount of traded currency. the larger the trade value between two countries, the more liquid the currency pair of these countries will be.
We discussed the EUR/USD in our example earlier and it is the most liquid currency pair in the entire Forex market, the most popular currency pairs to which this pair is a part of are known as the majors or major pairs.
There is no exact list that defines the exact major currency pairs or what the best currency pairs are, but when we talk about the majors, we are usually referring to the six most actively-traded Forex pairs with the highest liquidity levels.
These pairs include:
It’s no real surprise that the currencies listed here are from vast economically stable countries that have massive amounts of services and traded goods and is the main reason for their currencies being traded so frequently. Historically speaking these nations are generally stable especially in tones of political and economical uncertainty.
The dollar is the most popular currency of choice due to central banks supporting it as a reserve currency and as well as that commodities such as oil are priced in dollars. This gives the usd a advantage in that it’s becomes a necessity in order to trade commodities that it is valued in. Secondarily the euro is most popular currency and now maybe you can see why the EURUSD is the most widely traded pair.
Currency pairs can Characteristically Behave in a sort of predictable manner and have been known To exhibit behavioural patterns when speaking in terms of historical data and price action. This subject is perhaps to lengthy for this particular video but we will go on to it in future educational episodes.
So… what are the benefits and draw backs of trading the major currency pairs?
The greatest advantages of major currency pairs stem from their popularity. You will find that it is safer to trade them as news regarding these pairs are more readily monitored and updated. This gives you appropriate time to plan or avoid trading during certain time windows and regular economic updates can provide opportunities for sharp price movements in time junctures that you can anticipate and possibly profit from.
Depending on what type of trader you are this is not without the significant draw back of time spent, for certain traders being successful in the Forex markets can require them to be constantly monitoring news developments, forecasts, economic announcements, and other kinds of data. The largest draw back is obviously the potential for time spent vs reward or loss produced.
The massive amounts of liquidity available in the major pairs has multiple benefits.
When transaction costs are driven down by greater volume, the result is more liquid currency pairs can be traded on very tight spreads. Greater liquidity also equates to lessened volatility in general but no currency pair is exempt from experiencing massive and freakish volatility and you shouldn’t forget this.
Volatility can also be regarded as a draw back for short-term Forex traders. If they’re not prepared or aware of the sudden shifts that the market can take, they could potentially sustain huge losses.
The Major Forex Pairs all in all are a Good Place to Start your trading journey. Overall, the benefits we have discussed such as tighter dealing spreads and greater availability of economic news I believe outweigh the potential draw backs which can be trade style dependent. When we trade the the major pairs we have foresight and volume on our side and with the ability to trade on a demo account using real conditions without the draw back of risk there is no need not to get started right away.
I hope you have found our discussion today informative ladies and gentlemen please sit back and contemplate what you have learnt here today and Remember contemplation is the key to learning.