Understanding Major Currency Pairs in Forex Trading
What are major currency pairs? For those of you who are new to Forex trading, the first thing that you need to know are currency pairs before looking at the major pairs. The best part is that understanding the basics is not complicated, and for each currency the process of quoting the pairs remains the same, whether the pair is popularly traded, or whether it is an exotic currency pair.
What is a Forex Currency Pair?
It is a common practice among financial traders to look for profit through speculation of change in value of any instrument like share prices or a commodity’s worth. The only difference in Forex trading is that you have to speculate on one currency’s value in relation to another’s. So, when you speculate two currencies for Forex trading, it is referred to as currency pair. The relative value then gets expressed in number of units one currency is worth with reference to the other. For example, in case the US dollar’s worth against the Yen (Japanese) exchange rate happens to be 115.00, it means that 1 US dollar is worth 115.00 Yen. Yes, it happens to be that simple.
What are the Major Currency Pairs?
Those currency pairs that are most popular are called the majors. No standard list has been formulated yet to define major currency pairs, but usually, when discussing the majors, we refer to the following 6 actively-traded pairs:
- Australian dollar vs. US dollar or AUD/USD
- Euro vs. US dollar or EUR/USD
- US dollar vs. Canadian dollar or USD/CAD
- British pound vs. US dollar or GBP/USD
- US dollar vs. Japanese yen or USD/JPY
- US dollar vs. Swiss franc or USD/CHF
It is not a surprise that the above-mentioned currency pairs belong to the largest economies in the world. The huge amount of services and good trading that take place within these nations happens to be one of the main reasons for their extensive trading. The history of economic and political stability of these nations is one more reason why these currency pairs are so popular. This stability boosts the appeal of these countries, particularly in case of any economic uncertainty.
Why Trade In The Majors?
It is common to come across news related to the majors during Forex trading. You will also be regularly updated with the underlying economies of these pairs as they are very closely monitored in the global market. This provides you with opportunities to anticipate the price movements in different time junctures.
Also, the high amount of liquidity associated with the majors can prove to be highly beneficial for you as a Forex trader. With the transactions expenses being driven down because of greater volumes, it becomes possible to trade more liquid currency pairs on tighter spreads. The high liquidity also results in smoothing the overall volatility. However, don’t forget that even highly liquid currencies can be volatile, if the circumstances are right. But that kind of price shocks happen to be extremely rare.
In general, liquid markets are characterized by smooth price action, and rigorous sharp moves can only be found in those markets that are less liquid. It is this deep liquidity characteristic of the majors that ensures more ease in transactions.
Why Should You Opt for Trading in Major Currency Prices
The dealing spreads are tighter, and there is great availability of Forex analytics and economic news. The majors are a great way for beginners to explore the Forex market.
What affects the Prices of these Majors?
In Forex trading, the following two factors greatly affect the prices of the majors:
Due to the complexity of the Forex markets, several fundamental factors influence their value, but interest rates play a crucial role in affecting their value. The central bank of a country has direct control over interest rates. Change in interest rates can significantly affect the currency of the country. This makes the central bank of the country instrumental in driving the Forex market.
While the central bank has direct control over interest rates, economic growth and employment are free from the control of the central bank. Employment affects the prices in Forex trading because it has a direct effect on consumer spending. Moreover, consumer spending also affects inflation, and inflation influences the central bank’s decision regarding interest rates.
With increase in employment, the consumer spending also increases in the country. That will help with more employment while increasing the domestic demand. Therefore, the effects of employment on the currencies are immediate, and can also forecast the movements of the central bank.
As a Forex trader, you need to keep an eye on the currency correlation prior to trading. And with proper information at hand, you will find this trade to be a profitable venture.