The major forex pairs

Benefits of trading the major currency pairs

Trading the major forex pairs offers several advantages that make them the go-to choice for traders. Here are the main benefits:

High liquidity

One of the most significant benefits of trading the major currency pairs is their high liquidity. Liquidity refers to the ease with which an asset can be bought or sold in the market without affecting its price.

The major pairs involve the most traded currencies globally, leading to a constant flow of buying and selling activity. This high liquidity ensures that traders can enter and exit positions quickly, even with large orders, without experiencing significant price slippage.

Tight spreads

The high liquidity of major currency pairs contributes to another key benefit: tight spreads. The spread is the difference between the bid (buy) price and the ask (sell) price. In a liquid market, this difference is minimal, reducing the cost of trading.

Tight spreads are particularly important for traders who use short-term strategies like scalping, where frequent trades are made for small profits. Lower trading costs can significantly improve overall profitability.

Market transparency and predictability

Major currency pairs are backed by the world's largest economies, which means they are subject to a wealth of economic data and news. This transparency allows traders to make more informed decisions based on economic indicators like GDP growth, inflation rates, and central bank policies.

Additionally, the relative stability of these economies makes major pairs more predictable compared to exotic pairs, which can be influenced by less transparent or more volatile economic conditions.

Broad accessibility

Because major currency pairs are the most popular in the forex market, they are widely available across all trading platforms. This broad accessibility ensures that traders can find plenty of resources, tools, and educational materials tailored explicitly to trading these pairs.

Moreover, the widespread coverage of these pairs by financial news outlets means traders can stay informed about the latest developments that may impact their trades.

Lower Volatility (with exceptions)

While some major pairs, like GBP/USD, can be volatile, others, like EUR/USD and USD/JPY, typically exhibit lower volatility.

This lower volatility can benefit traders who prefer a more stable trading environment where price movements are less erratic and more reflective of fundamental economic factors. This stability makes it easier to apply technical analysis and predict potential market movements.

Safe-haven status

Several major pairs include currencies that are considered safe havens, such as the Swiss franc (CHF) and the Japanese yen (JPY). During periods of global economic uncertainty or market turmoil, these currencies tend to appreciate as investors seek safer assets.

Trading major pairs that include these safe-haven currencies can provide opportunities to hedge against risk or capitalise on market sentiment shifts.

Drawbacks of trading the major currency pairs

While major currency pairs offer numerous advantages, they are not without their challenges. Before you start trading, keep in mind the following drawbacks:

1. High competition and market efficiency

Major currency pairs, such as EUR/USD and USD/JPY, attract many traders, from individual retail investors to large institutional players like hedge funds and banks.

This intense competition can lead to a highly efficient market where price movements quickly reflect all available information. As a result, it can be more challenging for traders to identify and exploit inefficiencies or gain a competitive edge.

2. Lower profit margins due to tight spreads

While tight spreads are generally beneficial because they reduce transaction costs, they also mean that profit margins per trade can be lower. This is particularly relevant for traders who rely on larger price movements for significant profits.

With less room for large gains on each trade, traders might need to increase their trade frequency, which can add complexity and increase exposure to market risks.

3. Fewer opportunities due to low volatility

While low volatility in major currency pairs can benefit risk-averse traders, it can also be a drawback for those looking for more significant price swings and higher profit opportunities. In markets with more stable price movements, traders might find fewer opportunities for substantial gains.

This can make it challenging to achieve substantial profits without employing larger positions or more aggressive strategies.

4. Overreliance on economic data

Major pairs are closely tied to economic indicators from the world's largest economies, such as the US, Eurozone, and Japan. While this provides opportunities, it also means these pairs can be heavily influenced by economic releases like GDP data, employment reports, or central bank announcements.

High sensitivity to economic news can lead to sudden and significant price movements, which might disrupt trades if you're unprepared for the short-term volatility that such data can cause.

5. Crowded trades

Major pairs are popular not just among individual traders but also among large institutions. This popularity can sometimes result in crowded trades, where too many market participants are on the same side of a trade.

For example, if there's a widespread expectation that the USD will strengthen, a significant number of traders may go long on USD pairs, which can reduce the potential for profit as the market becomes saturated and less responsive to new information.

6. Significant impact of central bank policies

Major currency pairs are heavily influenced by the monetary policies of their respective central banks, such as the Federal Reserve for the USD or the European Central Bank for the EUR. While these policies provide predictability, they can also introduce risks.

Unexpected interest rate changes or shifts in monetary policy can lead to sharp market reactions, potentially resulting in losses if traders are caught off guard. The heavy dependence on central bank decisions can sometimes overshadow other market factors, limiting trading opportunities to specific economic events.

Conclusion: Understanding and trading the major forex pairs

The major forex pairs are a great place to start when you are beginning to learn about forex, especially since they’re tied to the world’s biggest economies. Because they’re so liquid and have tighter spreads, a lot of traders focus on them. Before diving into the rest of the market, it’s good to really get to know how they move.

As mentioned, major pairs tend to respond to big economic news, which can make them easier to follow. However, surprises can still happen. That’s why it’s important to stay on top of global events and have a solid trading plan in place.

If you keep an eye on the news and stick to a thoughtful strategy, trading the major pairs could give you a strong foundation for your forex trading and become a stepping stone to other currencies.