Today, more people are looking into starting trading in the forex market. Over the last few years, it’s undeniable how its growth is significantly taking over, which is why many find it enticing to try. Indeed, trading currency pairs and strategising when to buy, sell, or trade yours can be an intriguing financial activity to explore.
Currency pairs are the backbone of forex. They’re the “assets” shaping the market–and their movements determine its liquidity. In forex, currency pairs comprise the base and quote currency. It’s easy to identify which is which because the first currency in a pair is always the base. The quote currency always follows after the slash, but it’s the one that gives value to the base currency. Let’s look at this pair as an example: USD/JPY–the U.S. dollar is the base, while the Japanese yen is the quote currency.
Anyone can trade, sell, or buy different pair types in the forex market. They are the major, minor, and exotic currency pairs. In this post, let’s look at the advantages of trading each currency type to help you know which pairs to choose best in forex.
Major currency pairs
Major pairs are the currency pairs in the forex market that always have the U.S. dollar paired with it. The USD can be the base or quote currency paired with other currencies from countries with top-performing economies. The major pairs are also the most traded in the market. Here’s a list of the top major pairs to get to know them:
Aside from these four, there are many other major currency pairs that you can trade in forex. Let’s look at the advantages of choosing them as your currency pairs.
1 – They’re the most liquid pairs in Forex
The term liquidity in forex refers to how active the market is. Among the three types, trading with major pairs comes with the highest liquidity because 85% of the trade volume in the market is due to them.
Liquidity also refers to how quickly you can trade, buy, and sell your pairs. And since many trades with major currency pairs, it’s easy for people to enter and exit the market confidently because of its liquidity.
2 – Major pairs have tight spreads
In the forex market, spreads refer to the difference between a broker’s sell and buy rates for trading or exchanging currency pairs. Investopedia says that spreads can either be narrow or wide. The spreads also vary on the currencies you choose, the time you trade, and the economic status of the country of your choice of currencies.
Since major currency pairs are liquid, the likelihood that their spreads are tight is high. Having tight spreads is an advantage because it means that a trader’s dealing costs are lower, making a trader’s margin for profit higher.
3 – Their value is less likely to depreciate or fluctuate
According to professional traders, the major pairs are the safest choice to start in the market. And since the economies of the countries of major pairs are stable, their value is less likely to depreciate or fluctuate at any given time.
Because of the stability of those countries’ economic conditions, the major pairs are the least volatile currencies in the market. It’s one of the reasons they’re the most popular among traders.
Minor currency pairs
The second currency type in forex is the minor pairs. Minor currency refers to pairs where one top-performing currency pairs with another performing currency. Unlike with majors, you won’t find the U.S. Dollar in any minor pair.
Another term that traders use for minor pairs is “crosses.” They also have less liquidity than the majors. Because of that, many trade minor pairs because of their enticing trading costs. Here are some of the top-performing minor currency pairs in the market and their advantages:
1 – Many minor pairs are more volatile than majors
I mentioned earlier that majors are the least volatile in the market–making minor pairs more volatile. Despite being volatile, it’s advantageous for traders because higher volatility means higher trading movements for every session.
Traders say it could be beneficial because it’s an opportunity to drive incremental profits, which could benefit a trader’s portfolio.
2 – Minor pairs are the best choice if you want to leverage volatility within short periods
Despite not having the U.S. Dollar in its pairs, minor pairs have strong currencies like the Euro. That’s an advantage because the demand for buying and selling Euro instantaneously allows traders to enjoy a higher opportunity for better liquidity value.
That’s one of the reasons many day traders choose minor pairs because the chances of increasing its liquidity allow them to make the most of the market’s volatility within short periods.
Exotic currency pairs
The last currency pair in the forex market is the exotic pair. Exotic pairs consist of one currency from a developing country paired with a major currency. Here’s a list of some exotic pairs you can trade.
Despite being the least traded pairs in the market, choosing exotic pairs could provide advantages to traders. Here are some of the benefits of trading exotic pairs.
1 – The possibility of getting higher returns
Since exotic pairs consist of a currency from a developing country, they’re prone to price fluctuations. However, that could be an advantage because sudden rate changes in the market could provide higher potential returns.
Sometimes, trading with exotic pairs could provide a higher profit return because major and minor pairs offer safe and stable returns. But with exotic pairs, opportunities to sell them at a higher rate could happen–if the market fluctuates to your advantage.
2 – It could provide hidden opportunities because it is thinly-traded
Another advantage of exotic pairs is the hidden and sudden opportunities they could provide to a trader. Many traders take the time to learn how exotic pairs work. Even though they’re not liquid, they help traders study and navigate the market better by trading exotic pairs.
Because more people are focusing on specialising in major and minor pairs, it allows others to take advantage of the risks of exotic pairs by learning their movements.
There’s no perfect currency pair to trade, just the right ones that align with your trading plans and strategies.
Each currency pair type comes with advantages and disadvantages. But at the end of the day, it will depend on you which currency pair to choose. Some might choose to trade with exotic pairs despite its risks because of the advantages it could provide and vice versa. And so, you must pick the ones that best align with your trading plans and strategies.
Photo by Nicholas Capello from Unsplash; free to use under the Unsplash License