Major forex currency pairs: what is it, benefits and cons of trading, full list | FxPro
Table of Contents
The major currency pairs in Forex Trading are the most widely traded. They tend to have more stable prices, even though they can get wildly volatile at times. Learning about major currency pairs is part of laying a good foundation for your Forex education. So stick with us to the end of this article!
Major currency pairs are made of currencies from the world’s super-power economies. Traditionally there are four major currency pairs:
Opinions have varied over time and led to the expansion of the major currency pairs list. Sometimes the following pairs are also considered majors:
One of the most pronounced aspects from the list of major currency pairs above is that they commonly have the US dollar on one side. On top of that, these are the currencies that make up most of the volume in the Forex market. When you check out these currency pairs on your brokers' platform, you will notice that they typically have the smallest spreads and are the most stable. Most amateur traders and even some experienced investors prefer taking positions in major currency pairs than the rest of the Forex Market.
The below table contains some of the major currency pairs and their nicknames:
EUR AND US dollar
US dollar and Japanese yen
British pound and US dollar
US dollar and Swiss franc
Australian dollar and US dollar
US dollar and Canadian dollar
US dollar New Zealand dollar
Cost of Trading: Like any other business, you want to keep your costs low while engaging in Forex trading. Forex major pairs are currency pairs that offer you a chance to make trades in the Forex market at a low cost. Although brokers differ, you’ll probably notice that the majors have the lowest spreads across all trading platforms. Forex traders with low capital prefer investing in the majors for that reason. Some well-capitalized investors do so too for purposes of keeping their risks as low as possible while maximizing their returns.
Stability and Prediction: Forex trading is a zero-sum game. You are either in to make money or to burn your fingers. There are no grey areas. You want to increase your chances of success by trading assets that are more predictable and stable. Trading most Forex instruments like USDMXN and EURTRY exposes your funds to high volatility and a level of price instability that can easily wipe away your account. The majors are more stable and easier to predict.
Safety: The stability of major pairs makes them a haven for investors looking to put their money in low-risk Forex pairs. Firstly, they are backed up by strong economies that are rarely swayed by minor events, and second, they are highly liquid and less susceptible to manipulation. Majors purely move based on 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.
Major pairs belong to strong and stable economies with a balanced economy. The prices of these currency pairs are free and floating, which means they fluctuate based on the main market forces of supply and demand. High demand for a currency raises its price, while a low demand leads to an oversupply of the currency and eventually lowers its price.
Although free and floating economies are supposed to run without any manipulations, once in a while, the Central banks may interfere with the floating prices, especially if they are threatening to destabilize the economy. In that case, no economy runs 100% 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 and central banks. As much as the hand 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.
Let’s use the example below to learn about price quotes and fluctuations among the majors.
Any Forex trading platform has numerous currency pairs. All of them are represented by three letters according to the regulations of the International Organization for Standardization (ISO). For example, the, British Pound= GBP, Japanse Yen= JPY, Euro =EUR, US Dollar= USD, Swiss Franc = CHF, and Australian Dollar = AUD.
Majors, like all other currencies, are quoted against each other. So when you’re trading, keep in mind that you’re not just handling one currency but exchanging one major currency for another. There is the base currency, which is the main currency you are transacting, and then there is the quote or counter currency. Looking at the major currency pair EURUSD, the “EUR” is the base, and the “USD” is the counter currency. The ratio of the two currencies is what we call a major pair.
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 EUR.
To calculate how many Euros you need for a dollar, follow the following calculation
So at the above rate, we would need €0.66 to purchase a single dollar.
After a price change to $1.8, our new cost for a dollar using Euros will be
You can see that when the rate of the EUR went up, it now costs us about $0.11 fewer Euros to acquire a dollar than before.
Popularity: Forex major pairs are very popular, so you will find that information about them is readily available on the internet. For example, economic reports about these economies are readily available. Also, most analysts discuss major forex pairs in their forums, and this means you have a whole lot of information to help you make proper trading decisions when it comes to the major pairs.
This comes with a limitation. Analyzing the available information about the major pairs may not be a walk in the park. A great deal of attention and commitment is necessary to filter useful information from the noise and to be able to make the right trading decisions. You need to watch the economic calendar and keep tabs on all other events that may affect the strength of the majors that you trade.
Low Spreads: Trading the majors means you are exposed to low spreads and generally smooth liquidity. Major currency pairs are mostly calm due to an abundance of liquidity which makes it easier to spot opportunities. It should be noted that some unusual events can happen from time to time leading to excess volatility even in the most stable currencies like the major currencies.
This leads us to another con of trading the majors. Unlike investing in a fixed interest account, investing in major currencies doesn’t assure you of regular and fixed returns. The risk of trading during extremely volatile periods is that you may get your account all wiped out in no time. As much as one may want to avoid this, it’s almost impossible as there is no warning beforehand. A good example is the dangerous volatility that was witnessed on USDCHF after the Swiss National Bank changed its policies on currency capping.
Whether you’re a beginner or a pro, 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 that need advice on a major currency to start with, we recommend EURUSD and USDJPY. They are very stable, calm, and easy to understand even if you don’t have a lot of prior trading experience.