The Forex market is the largest and the most actively traded financial market. It includes simultaneous buying and selling of the currencies from two different economies to gain profit. Multiple currencies are exchanged daily by pairing with one and the other. A currency pair includes a base currency (the first named currency) and a quote currency (the secondary currency). Depending upon the currencies, the currency pairs are categorized into three types, i.e., major currency pairs, minor currency pairs, and exotic currency pairs.
In this comprehensive blog, we will explore in detail the fundamentals of the most popular currency combinations, i.e., major currency pairs.
What are major currency pairs?
The major currency pairs account for 75% of all forex trades. They are highly liquid, meaning they offer plenty of opportunities. Examples include the combinations of the U.S. dollar (USD) with the currency of the stronger economy, i.e., Swiss franc, British pound, Japanese Yen, and Euro.
The seven major currency pairs are as follows-
- EUR/USD: The euro and U.S. dollar, known as “Fiber”. It accounts for more than 20% of the forex transactions.
- USD/JPY: The U.S. dollar and Japanese Yen, known as “Gopher”.
- GBP/USD: The Great Britain Pound and U.S. dollar, known as “Cable”.
- USD/CHF: The U.S. dollar and Swiss Franc, known as “Swissie”.
- AUD/USD: The Australian dollar and U.S. dollar, known as “Aussie”.
- USD/CAD: The U.S. dollar and Canadian dollar, known as “Loonie”.
- NZD/USD: The New Zealand dollar and U.S. dollar, known as “Kiwi”.
Only four of these most traded currency pairs, EUR/USD, USD/JPY, USD/CHF, and GBP/USD, are traditional major pairs. The other three, NZD/USD, AUD/USD, and USD/CAD, are commodity pairs.
How major currency pairs are traded?
Trading major currency pairs offer traders a unique advantage due to the high liquidity and low forex spreads associated with them. Here’s a closer look at how to trade the major currency pairs:
High liquidity and tight spreads
Major currency pairs are traded in high volumes, which makes them highly liquid. This high liquidity typically results in tighter forex spreads, meaning there is less difference between the bid and ask prices. For traders, tight spreads are advantageous as they reduce transaction costs, allowing for potentially higher returns on each trade.
Influential Market Factors
The value of the major pairs is significantly impacted by economic indicators, geopolitical events, and central bank policies from their respective countries. Traders should closely watch factors such as U.S. employment reports, GDP data, and interest rate announcements by central banks like the Federal Reserve, European Central Bank, and Bank of Japan.
Staying informed on these developments can help traders, be they beginners or experienced in predicting currency movements more accurately.
Popular Trading Strategies
Due to their high liquidity and predictable behaviour, major currency pairs lend themselves well to both long-term and short-term trading strategies. Some of the few popular approaches are:
- Day Trading: In day trading, the traders buy and sell the currency within the same trading day to take advantage of short-term price fluctuations often triggered by economic news.
- Scalping: This involves executing numerous trades throughout the day to capture small gains from rapid market movements.
- Swing Trading: Traders hold onto a position for several days to take advantage of anticipated price movements based on technical and fundamental analysis.
Market Sessions and Timing
Different trading sessions impact the trading volume of each pair. For instance, EUR/USD and GBP/USD see high activity during the European and U.S. trading sessions, while USD/JPY is most active during the Asian session. Understanding the times of peak liquidity for each pair can help traders identify optimal entry and exit points.
Conclusion
To conclude, the major currency pairs are an essential part of Forex trading as they have high liquidity, predictability, and relatively low Forex spreads.
From the heavily traded EUR/USD to the USD/JPY, each major pair brings unique characteristics. If you are a beginner trader, focusing on major pairs can provide an ideal foundation for understanding the market dynamics before exploring more complex or volatile currency combinations.
However, traders need to stay informed and choose the right trading strategies to confidently navigate the highs and lows of currency trading.
