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Majors and Crosses – How to Trade Them

majors and crossesThis 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:

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.

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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.

Avoid Ranges

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.

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