Basic Concepts: Trading Majors & Crosses
Video Transcription: Introducing the Forex Dashboard – Majors and Crosses
We continue here with the training academy project on topratedforexbrokers.com, with one very interesting concept, the basics of Forex trading, the forex dashboard. What does it mean? Well it’s the bread and butter of Forex trading.
(0.18) If you want to buy or sell a currency pair where do we pick it from? It’s very simple, the dashboard. What makes the dashboard of the Forex broker, the market watch or the MetaTrader here, or if you trade with a broker that has an in-house built trading platform, then simply use the search where the currency pairs are offered.(I tried, but this sentence doesn’t really make sense to me)
(0.43) This is the dashboard on the Metatrader, the most popular trading platform; you can simply click and drag and make it as big as you need.
Right-click here and you can choose an option to hide all, and only two or three currency pairs on the Forex dashboard will remain, or you can click show all.
(1.06) And not only the currency pairs are shown here in blue, but also the other products offered by the broker, for example, this broker offers commodities like gold, silver, oil and so on. But also the major Indices via a contract for difference or CFD’s. But let’s focus on the Forex dashboard and the currency pairs.
(1.29) You click and drag and pull anywhere on this screen, on the left side or right side, and you can split the screen how you would like, and you can also make it smaller. Let me show you here. And you can pull it here right into the middle of the screen, smaller, bigger, customise as you wish.
(1.56) Let’s click and drag here and see what the first currency is. And you can move the currencies as you would like, simply click and drag and it will move to another place.
(2.12) This one is the USD/Japanese Yen. And what is this one? This is the Australian dollar and the US Dollar, and we will put this here, we also have the GBP and the USD, we also have the USD/CAD, we also have the Eur/USD somewhere, let’s see if we can find it.
(2.41) The Great British pound/ Australian Dollar. No no no, New Zealand Dollar / Us Dollar and so on. Euro/US Dollar is probably a bit high. What is the common element in these currency pairs? Take a look here.
(2.56) USD/Swiss franc, Eur/USD , USD/Japanese yen, AUD/USD USD/CAD and GBP/USD, New Zealand Dollar/USD. What are these eight currency pairs? These eight currency pairs represent the most liquid currency pairs of them all. In the overall Forex dashboard, out of all these currency pairs here, these eight represent the most liquid, and the most popular to trade.
(3.30) In other words, if you want to trade the FX then you have got to know the faith of the USD. This is not random, and I will explain why. First of all and by far, the most important thing. Is that US Dollar is the World’s Reserve Currency.
(3.51) What does the World’s reserve currency mean? It means that when foreign countries or states decide to invest their fortunes, their excess liquidities to build up reserves for natural disasters, or to simply invest, then they keep their money in a specific currency, and it doesn’t need to be a local currency.
(4.15) For example, in the eurozone reserves, you will be surprised to hear, will not only be in euros, for diversity reasons, they are also in USD. In Japan you will be surprised to hear that not all reserves are in Japanese Yen. But in USD and of course other currencies.
(4.34) Currency that has the biggest share in worldwide reserves is the USD. Hence why the Dollar is the World reserve currency. Hence why all the currency pairs that make up the dashboard and have USD in their components and are called majors, or major pairs. All the currency pairs that have the dollar in their components are major pairs.(types it out)
(5.07) What do we have here, we have the usual suspects, we will show you just a few. We have Eur/USD, we also have USD/Swiss Franc, we have USD and Japanese Yen, you name it and everything on the left side here that has the dollar in their components, is a major pair.
(5.41) Every other currency pair that doesn’t have the USD in their components is called, not a minor, but a Cross. This is the only difference between the currency pairs that make up the Forex dashboard. They are either major pairs or crosses.
(6.07) If you open any trading account with various brokers, you will find out that things are not that straightforward. They will try to put these other currency pairs in various categories, for example, you will have a category called exotics, which sounds fancy right? And exotic currency pairs like New Zealand Dollar and Canadian Dollar and Euro/Mexican. It is not really exotic, it is just a cross pair that doesn’t have the world’s reserve currency in it.
(6.42) You will be surprised, that if you check the statistics of the most traded currency pairs of them all, these are the ones. The ones with the USD in their components, and this is normal because the dollar sits at the heart or the very core of our financial system.
(7.08) Then the flows that pour from an investment in overseas must be transferred into dollars and then in that local currency. Imagine a country like Romania buys oil, it cannot buy oil in anything except USD, it will exchange the local currency into USD, and with those dollars, they will purchase oil.
(7.36) This transaction will cause the FX market to move. Extrapolate or put this into perspective. All the International transactions in the World. Then you will see a reason why Major Pairs and Crosses form the Forex Dashboard.
(7.53) Of course, they move differently. Some are more liquid, and the most liquid of these is the Eur/USD. Crosses are less liquid. We can see this in the spread, what is the spread of a currency pair?
(8.07) The difference between the bid and the ask price. Let’s have a look at the eur/usd 18135 18138 or so, so the spread between the bid and ask is zero point something which is quite small, because many parties exchange the eur/usd, being the most liquid currency pair.
(8.30) But let’s go on the New Zealand Dollar/Canadian Dollar we have 0.90287 0.90303 so, 1.5 pips. It means it is more expensive or less liquid as a currency pair; this may not seem much from 1.5 pips to zero point something, one may say, who cares? as I am in for 100 pips.
(8.55) But FX Trading is not only in for 100 pips. You may be in for ten pips. you may have a strategy, that is excellently executed by an expert advisor, and for that strategy, not to fail, it needs to go for ten pips profit for every trade.
(9.15) If your cost, because this is a cost the moment you buy or sell New Zealand Dollar/Canadian Dollar, at that very moment you pay this spread of 1.5 pips. And if your take profit to be reached at ten pips. Your real profit will be ten minus 1.5, and your potential gain is less 15%.
(9.39) I just wanted to explain to you the major difference between major and cross pairs. They are also moving in tandem, or in pairs as for every major, there are two crosses. More on that later in this trading academy, thank you for being here and goodbye for now.
This Forex trading academy has already dealt with the concept of a currency pair, and why currencies are paired together. To fully understand how to trade different currency pairs, though, further details are needed. As mentioned in the previous article dedicated to currency pairs, they are grouped as majors and crosses, the distinction being made based on the world’s reserve currency, the US Dollar. Some brokers use different categories as well the ones above, and, from broker to broker, the following other categories can be found:
- Minors – This category generally includes crosses that are not traded so often. The currency pairs that fit into this category are CAD/CHF, NZD/CAD, AUD/JPY, and USD/HKD, to name but a few. The usual caveat applies here too: The spread on crosses is bigger than the spread on major pairs, and this is why they are not that attractive for speculating purposes.
- Exotics – These are currency pairs that represent second-tier economies in the world, and in this category there are also USD pairs. For example, USD/BRL is an exotic currency pair that travels based on the difference between the US economy and the Brazilian one, pairing the US Dollar with the Brazilian Real. Other examples in the category are EUR/TRY (Euro vs Turkish Lira), EUR/SGD (Euro vs Singapore Dollar), USD/PLN (USD vs Polish Zloty); and the list goes on. Virtually all smaller countries/economies currencies can be found here, being paired either against one another or against the US dollar.
The two categories above are just examples of how the currency pairs can be/are grouped by different brokers, but what matters the most is the main division: majors and crosses.
How to Trade a Currency Pair
A currency pair can be either bought or sold, and the idea is to make a profit from the swings in the Forex market. The best part of it is the fact that one doesn’t need to own something in order to sell it. Selling can simply be made on expectations that the currency pair will move to the downside and, if indeed that is the case, the currency pair can be bought later from lower levels, the difference being called a profit. However, the profit made when trading a currency pair is not fully seen in the balance of a trading account, as from that amount the broker’s commission and the currency pair spread are deducted. For this reason, currency pairs that have a lower spread (difference between the bid and ask price) are more attractive to traders, as the expenses incurred when trading them are smaller. For similar reasons, majors are favoured, as spreads are much lower on the currency pairs that fit into that category than on pairs in a cross.
The Importance of Spreads
Let’s see some examples, but keep in mind that this differs from broker to broker, and depends very much on the technology the broker uses, liquidity providers, and much more. EUR/USD, for example, is a major, and on a five-digit account (meaning the quotation has five figures after the comma) the spread varies between 0.2 and 0.9 pips at any one moment in time during the trading day. In other words, if a profit of 10 pips is made on a trade, the real pips credited are 10 minus the spread, so it will be between 9.8 and 9.1 after spread is deducted. The CAD/CHF, on the other hand, is a cross with a typical spread of between 4.5 and 6 pips. Therefore, the same 10 pips profit made on this cross will actually mean that between 4 and 5.5 pips will be credited, the rest being the spread that is paid.
The examples above are meant to show that making a profit of 10 pips, or as a matter of fact, any kind of profit, doesn’t mean that the whole amount is seen on the trading account. This makes some currency pairs more favoured, and trading will be more active on these ones. This raises a liquidity issue as well, as currency pairs that are traded more actively are very liquid, and the ones that aren’t suffer from this point of view. It means that violent spikes are to be seen more often on currency pairs that are less liquid. Majors are by far more liquid than crosses, and the fact that they are traded so actively on a day-to-day basis allows brokers to lower the spreads for these pairs. The opposite is true in the case of crosses.
During a trading day, there are three important trading sessions that basically follow the sun: the Asian session, the London session, and the North-American/New York session. In the order of their importance, the London session leads, followed by the New York and Asian ones. As a rule of thumb, the London and North-American sessions are characterised by sharp movements in currency pair prices, while the Asian session is dominated by ranges. Adding to that the fact that crosses move less than majors anyway, then trading a cross currency pair in the Asian session is like watching grass grow, as little or no price action is the norm. Trading a major pair in the London session, on the other hand, is the subject of a lot of price action, and quick profits/losses can be made.
Avoid the US Dollar.
Another way to trade a currency pair is to watch the economic calendar for a US dollar-driven event, such as NFP (Non-Farm Payrolls) or the Federal Reserve meeting on interest rates. It means that the US dollar pairs will move aggressively in the same direction, as a US dollar-driven event influences prices. To reduce that exposure to risk, one can trade a cross that doesn’t have the US dollar in it. For example, trading the EUR/JPY cross during a US dollar-driven event should be safer than trading a major pair. All of the above are just generalities and tips and tricks to follow when trading a major or a cross, and the reasons behind choosing one category over the other, and they are very useful if considered on the day-to-day trading activities.
Other educational materials
- Leverage and Margin Requirements
- What is a Margin Call?
- Setting Up a Chart in Metatrader 4
- Forex Trading Accounts and the Value of a Pip
- The Importance of Swap and Spreads
Recommended further readings
- CFDs Made Simple: A Beginner’s Guide to Contracts for Difference Success. Cartridge, J., & Jessen, A. (2011). John Wiley & Sons.
- Essentials of foreign exchange trading Chen, J., 2009. (Vol. 44). John Wiley & Sons.