Majors and Crosses – How to Trade Them
This Forex trading academy already treated the concept of a currency pair and why currencies are paired together. To fully understand how to trade different currency pairs, further, details are needed, though. As mentioned in the previous article dedicated to currency pairs, they are being grouped as majors and crosses, and the distinction is being made based on the world’s reserve currency, the US dollar. Some brokers use different categories as well on top of the ones above, and, from brokers to brokers, the following other categories can be found:
- Minors. This category generally to crosses that are not traded so often and the currency pairs that fit into this category are CAD/CHF, NZD/CAD, AUD/JPY, USD/HKD, only to name a few. The usual caveat applies here too: the spread on the crosses is bigger than the spread on the 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 can go on. Virtually all smaller countries/economies currencies can be found here being paired against either one another or against the US dollar.
The two categories above are just examples on 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 and the difference is being called a profit. However, the profit being 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. Therefore, 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. Just like that, majors are being favored as spreads are way lower on the currency pairs that fit into that category then the spreads 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 vary between 0.2 to 0.9 pips at any one moment of time during the trading day. In other words, if a profit of 10 pips is being made on a trade, the real pips credited are ten less 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 between 4.5 and 6 pips. Therefore, the same 10 pips profit made on this cross will actually mean 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 10 pips profit, 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 to be favored more and trading will be more active on those. This raises a liquidity issue, as well as currency pairs that are traded more actively, are very liquid, and the ones that don’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: Asian session, London session, and the North-American/New York session. In the order of their importance, the London session is leading, followed by New York and Asian ones. As a rule of thumb, the London and North-American sessions are characterized by sharp movements in currency pair prices, while the Asian session is dominated by ranges. Adding that to the fact that crosses are anyways moving less than crosses, then trading a cross currency pair in the Asian session is like watching grass growing 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 incur.
Avoid the US Dollar
Another way to trade a currency pair is to watch the economic calendar for a US dollar driven event, like 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 EURJPY 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 against the other and they are very useful if considered on the day to day trading activities.
Other educational materials
- Leverage and Margin Requirements
- Forex Trading Platforms – Metatrader 4 and 5
- 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.