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Be aware and take advantage of the major currency pairs in FX trading
Be Aware and Take Advantage of The Major Currency Pairs in FX Trading
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One of the most basic concepts of Forex trading is Forex currency pairs. They’re not difficult to understand, but you first need to know the fundamentals, especially when it comes to taking advantage of the major Forex currency pairs.
Currency pairs are, quite simply, two currencies that are being traded. Usually, they are shown as such: EUR/USD. In this example, Euros and US dollars are being traded.
Quotes vs base currencies
The first currency in a pair is called a base currency, whilst the second currency in a pair is called a quoted currency.
In our example above, the euro is the base currency and the US dollar is the quoted currency. The base currency is the currency being purchased. The quoted currency is the currency being used to purchase the base currency.
The price
The price is the indication of how much of the quoted currency you’ll need to buy one unit of the base currency. If the price in our above example is quoted at 1.1250, it will cost $1.1250 to purchase 1 euro.
Major currency pairs
Each currency can be paired with any other, with either capable of being the quoted or base currency, because every currency can be traded.
However, there are some currencies that are far more popular trades than others, they are called the major Forex currency pairs, and they are as follows:
- US dollar (USD) and British Pound (GBP)
- Canadian dollar (CAD) and US dollar (USD)
- Euro (EUR) and US dollar (USD)
- Japanese Yen (JPY) and US dollar (USD)
- Swiss Franc (CHF) and the US dollar (USD)
- Australian dollar (AUD) and US dollar (USD)
- New Zealand dollar (NZD) and US dollar (USD)
As you can see, the US dollar features in every one of those pairs. The US dollar is the most traded currency, and accounts for over 95% of all trade in the Forex market.
Why are these the most traded currency pairs?
The Forex market operates to support the foreign trade system, which requires monetary units to be sent in and out of differing countries. As such, the currencies of the highest trade locations show the most volatility. This gives investors the chance to take advantage of fluctuations, with the opportunity of making quick profits.
Making the most of major currency pairs
In order to make best use of the major currency pairs, traders need to carefully watch business news and determine which factors will cause a value jump or fall in the currencies being monitored. These factors will vary according to the country. For example, the pound will be strengthened by a fall in unemployment figures, a rise in growth figures, or expectations of interest rates rising in the UK.
Quantitative easing is another major factor in currency valuation. This is when the government pours money into the economy to accelerate growth, and it usually causes a devaluation in the currency.
Starting with the majors
Since major currency pairs have the most supply and demand, their trading conditions are generally favorable. Spreads are lowest and SWAPs are generally the fairest. Although this provides a good reason to trade these pairs, the more important rule of thumb is to trade what you know. This will often be linked to the country you live in, and countries your industry trades in.
It’s important to be aware of the major Forex currency pairs, but that should not be the only determinant in what you choose to trade.
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