Pros and Cons of Trading Major FOREX Pairs: Beginners Guide

As with most things in life, to progress successfully in any new area, it is paramount to start by understanding the basics. In this case, grasping the meaning of “major” currency pairs in FOREX trading is no different. Indeed, a good starting point when learning how to trade FOREX online is to better understand currency pairs in general. The good news is that the basics are quite straightforward, and the way in which pairs are quoted works the same across all currencies, from those most popular and regularly traded to the more exotic and so-called “minor” FOREX pairs.

Introduction to Currency Pairs

By way of definition, the most popular traded currency pairs are known as the majors. However, before we look at what constitutes the major FOREX pairs, we need to discuss what a currency pair actually is. With FOREX trading, you are speculating on the value of one currency relative to the value of another. When the two currencies involved are grouped and valued against each other, they are known as a currency pair.

This relative value is expressed as the price of a certain number of units of the first currency in relation to the second currency. We will now present you with an example that would help you learn how to read currency pairs. If you were to look at live FOREX prices on a trading platform, like MT4 or MT5, you would see a wide variety of FOREX currency pairs listed. Every currency has a three-letter International Organization for Standardization (ISO) symbol, and they are fairly straightforward. For example, the GBP denotes the British pound while USD refers to the US dollar.

Let us suppose you think the euro will strengthen and the US dollar will weaken, you will likely want to sell the US dollar and buy the euro. The currency pair you are, therefore, interested in is the euro that you plan to buy using US dollars (EURUSD). Remember: a currency pair expresses how much one currency is worth relative to another currency, so the price quoted for the currency pair is the number of dollars per euro. If you are right and the euro strengthens, one euro will be worth more US dollars. In other words, the exchange rate will have gone up. So, if the EURUSD price is 1.5, it simply means you need $1.5 to buy one euro. If the price fluctuates to $1.8, it means the euro has gained strength against the US dollar, and now you need an extra $0.3 to buy one euro.

When working in the opposite direction and you are looking to use euros to buy dollars, follow the following calculation:

1/1.5= 0.66

So, at the above rate, you would need €0.66 to purchase a single dollar.

After a price change to $1.8, your new cost for a dollar using euros will be

1/1.8= 0.55

You can see that when the euro appreciated, it cost us about $0.11 fewer euros to acquire a US dollar than before.

Now that we have explained to you how to read a major currency pair as you would any FOREX pair, a good way to start trading FOREX is to start with something you know well. For instance, if you have close insight into a particular economy, you may naturally feel inclined to trade its currency. This could mean that you trade the currency of the country in which you live. Even if your home currency is not one of the majors outlined below, through knowing the economy well, you can make better use of the greater availability of economic news, as well as by supplementing it with FOREX analytics and technical analysis.

What are the Major Pairs Today?

According to numerous online sources, major currency pairs are made up of currencies from the world’s so-called “superpower” economies. Traditionally, these have been the major currency pairs:

1. EUR/USD

2. GBP/USD

3. AUD/USD

4. USD/JPY
5. USD/CHF
6. NZD/USD
7. USD/CAD

However, opinions have varied over time and led to the expansion of the major currency pairs list to also include:

8. EUR/GBP

9. EUR/CHF

10. GBP/JPY

It is noteworthy that one of the key aspects from the lists of major currency pairs is that they often have the US dollar on one side. Further, these are the currencies that make up most of the volume in the FOREX market, which is estimated at $6 trillion a day. When you check these currency pairs on your brokers' platforms, you will notice that they typically have the smallest spreads and are also the most stable. Most amateur traders, and even some experienced investors, prefer taking positions in major currency pairs over the remainder of the FOREX Market.

Why Traders Trade the Major Pairs

There are valid reasons why the major pairs get all the attention in the FOREX world. Here are the main ones:
Cost of Trading: Like any business venture and/or commercial transaction, you want to keep your costs as low as possible. Luckily, FOREX major pairs offer you a chance to make trades in the FOREX market at a comparatively low cost. Although this may differ from one broker to another, you will probably notice that majors have the lowest spreads across all trading platforms. This is why most FOREX traders with less capital prefer investing in majors. Some well-capitalized investors do so, too, in order to keep their risks to a minimum while also maximizing their returns.

Stability and Prediction: In all likelihood, you want to increase your chances of success by trading assets that are more predictable and fundamentally stable. Trading in minor FOREX pairs like USD/MXN and EUR/TRY exposes your funds to high volatility and a level of price instability that can easily wipe away your trading account and life savings. In short, majors are more stable and easier to predict.

Safety: Picking up on where we left off in the last point, the stability of major pairs makes them a haven for investors looking to put their money into low-risk FOREX pairs. First, they are backed by strong economies that are rarely swayed by secondary events, and, second, they are highly liquid and less susceptible to manipulation by exogenous factors. Majors purely move based on the forces of supply and demand. You will also get fewer occurrences of price re-quotes and slippage when trading the majors. All these contribute to a more reliable trading environment that attracts traders.

How are Prices of the Major Pairs Determined?

Major pairs belong to strong, stable, and well-balanced economies. As the prices of these currency pairs are often free and floating (not pegged by a government or a central bank), they fluctuate based on the main market forces of supply and demand. High demand for a currency raises its price (appreciation), while a low demand leads to an oversupply of the currency and eventually lowers its price (depreciation).

Though free and floating economies are supposed to run without any outside manipulations, once in a while central banks may interfere with the floating prices, especially if the prices are threatening to destabilize the economy. As such, no economy runs solely on market forces. Some level of government control ought to play in for a healthy economy. This leads us to conclude that prices for majors are determined by market forces as well as central banks, even if this is to a small degree. As much as the hands of central banks may be invisible, they are directly involved because they maintain a close eye on the daily prices of currencies and intervene when the prices go outside their “acceptable” zones.

Recommended Brokers

Evaluation Open Account

Evaluation Open Account

Evaluation Open Account

Pros and Cons of Trading Major Currencies

There is Lots of Volume

One of the biggest pros is that volume tends to attract even more volume. This is because with more trading activity, spreads between the bid and ask price tend to narrow. Trade between the major pairs is characterized by high volumes. They thus tend to have smaller spreads than exotic and minor pairs and attract the most traders to them, which in turn keeps the volume elevated.

Lots of Transparency with Plentiful Information

Another pro is that because FOREX major pairs are very popular, you will find ample information about them that is readily available on the Internet, as well as other new-age mediums. This includes economic reports and technical assistance, both easy to access. Also, most analysts discuss major FOREX pairs in their forums, and this means you have a whole lot of information to help you make sound trading decisions when it comes to major pairs.

This comes with one major con, however. Analyzing the available information about the major pairs may not be a walk in the park for the average trader. Indeed, a great deal of attention and commitment would be necessary to filter useful information from the noise and to be able to make the right and most prudent trading decisions.

It is clear, therefore, that one of the major cons associated with trading FOREX majors is that it requires a great deal of attention, and a lot of regular research, and, even then, this may not necessarily lead to traders achieving high returns.

Low Spreads Thanks to High Liquidity

To elaborate further on the first point in this section, when trading with major currencies, it often means you are exposed to low spreads and generally smooth, yet plentiful, liquidity. This is a big win for the average trader. Indeed, major currency pairs are mostly calm due to an abundance of liquidity that makes it easier to spot lucrative investment opportunities that could generate handsome gains. It should be noted that some unusual events can happen from time to time, leading to excess volatility even in the most stable major currencies.

As transaction costs are driven down by greater volumes, the more liquid currency pairs can be traded on much tighter spreads. Greater liquidity also acts to smooth volatility in general. Volatility itself can be regarded as a con for short-term FOREX traders. If they are not prepared or aware of the sudden shifts that the market can take, they could potentially lose a substantial amount of capital. It is, therefore, recommended for professional FOREX traders to still exercise careful risk management within their trading to ensure that they minimize the risks as much as possible.

You Can Use Leverage with More Confidence

Leverage in FOREX parlance is akin to a “loan” that the broker gives the trader so the trader has more capital with which to trade than what he or she initially put forward. For example, if the FOREX market jurisdiction in which you are located allows leverage of 50:1, one needs to have only $1 to take a FOREX position worth $50. If the market moves as expected, you are in for a large payout. However, if the currency you are banking on moves adversely, leverage will only magnify your losses.

While the practice of leverage is old and used across all currencies, it is safe to say that leveraging with majors is far less risky than would be the case with minors or exotic FX pairs. The relative stability and calmness surrounding majors, often backed by solid macroeconomic fundamentals of their respective countries, render investment in majors using leverage and margin as safer.

Risk and Volatility Still There

As aforementioned, even if your portfolio is made up of only majors, volatility is something you still need to take into consideration. One classic example of extreme price volatility involving majors would be the sharp plunge experienced by the USD/CHF currency pair in early 2015, after the Swiss National Bank (SNB) scrapped its strategy of capping appreciation within its currency.

In the years leading up to that event, the safe-haven nature of the Swiss franc, alongside the brewing eurozone debt crisis at the time, resulted in huge capital inflows into Switzerland. This was boosted by the SNB’s decision to intervene in the FOREX markets – buying foreign currency to depress the Swiss franc. However, when the SNB publicly and suddenly abandoned the policy, the value of the Swiss franc snapped like a rubber band against every other currency, sending the USD/CHF currency pair down by 25% in a matter of minutes.

The above illustration is useful in showing how things can go wrong, but, in reality, with majors, such price shocks are extremely rare. In fact, smooth price action is a characteristic of liquid markets, and extremely sharp moves are more common in less liquid markets. The deep liquidity of the general FOREX market, and the major currency pairs in particular, increase the ease of transactions. The latter is opposed to financial markets with thin liquidity, where it may sometimes be difficult to enter or exit a trade readily.

This last point leads us to another potential con of trading the majors. Unlike investing in a fixed-interest account, putting your money in major currencies does not assure you of regular and fixed returns. The risk of trading during extremely volatile periods is that you may have your account wiped out in almost no time. As much as one may want to avoid this, it is almost impossible, as there is no warning beforehand.

This all depends on your outlook. For some traders, FOREX simply does not provide enough value for the risk involved; but for others, the short-term nature of the market allows for traders to potentially earn (or lose) a lot in a short space of time. Perspective is a major factor in deciding whether or not to trade in the FOREX market.

You Miss the Big Swings Offered by Minors and Exotics

A final con of focusing all your efforts on major currency pairs involves you missing out on the big upswings that the exotic pairs can offer sometimes. Of course, there is a big drawback to this, as exotic pairs carry with them heightened risks that not any trader can handle or afford. These are pairs that offer less volume and far less liquidity, rendering them much more risky.

Margins are Tight

As above-mentioned, margins in major currency trading are tight. It is where all the action happens, meaning there is a lot more predictability and less inefficiency upon which to capitalize. Margins in major trading can be so tight that you could trade for a long time and not make that much money. You are bound to make losing trades almost as many times as you do winning trades, and when all is said and done, razor-thin margins and fees could erode your earnings. This must be viewed as a con.

Conclusion

Whether you are a novice trader or an old-hand professional, you will usually have at least one major currency pair in your trading basket. Trading major currencies is a good way of reducing your risk while still potentially making profitable returns. For newbies who need advice on a major currency to start, we at Arincen recommend the EUR/USD and the USD/JPY. They are very stable, calm, and easy to understand, even if you don’t have a lot of prior trading experience.

FAQ

What is meant by the majors currency pairs?

The major currency pairs refer to a relatively small number of strong and established currencies that drive global trade and, by extension, the FOREX market. They include, among others, the world’s biggest economy, the US, as well as the euro, a powerful financial bloc accounting for some 27 European economies. Other notable currencies include the British pound and the Japanese yen.

What are the eight major pairs?

The eight major pairs are commonly agreed to be EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CHF, NZD/USD, USD/CAD.

How do you read a pair in trading?

When reading a currency pair, you are trying to understand the value of one currency relative to the value of another. The two paired currencies are listed together, for example EURUSD. In practical terms, if the EURUSD price is 1.5, it simply means you need $1.5 to buy one euro. The currency you intend to purchase is mentioned first, and the purchasing currency is mentioned second, i.e., EURUSD.

Is it less risky to use leverage with majors?

Yes. This is because the spreads between major pairs are much tighter than minor and exotic spreads. When using leverage to trade majors, the risk is automatically reduced, as there is less on the line.