How to Trade a Major
The Forex dashboard is the area where all the available instruments for trading are listed. It is not mandatory that only currency pairs to appear there; gold, oil, indices and contracts for difference (CFDs) are listed too. Of all the currency pairs, major pairs are the ones that have the US dollar in their componence. The dollar is the world’s reserve currency, so everything that is happening in the world of finance around the globe is connected to the dollar. Therefore, when trading a major currency pair, the dollar should always be considered. It is not like the dollar is the only thing that matters, as the other currency in the pair plays an important role too, but the dollar’s role is determinant. Major pairs are of different types too: the very liquid and the less liquid. Because of that, the spread (the difference between the ask and the bid prices) is different for different majors. The EUR/USD pair is the most liquid currency pair of them all, and so it is no wonder it has the smallest possible spread. Some brokers offer the pair at a 0.2 pips spread or even lower, depending on the type of the trading account. By way of contrast, another major pair is the USD/CAD, and this one is normally offered at spreads bigger than 2 full pips. The above means that different trading strategies will have different results on different major pairs. For example, a scalping trading system that targets 10 pips profit will need to see price travelling approximately 20% more if the strategy is applied on the USD/CAD pair than on the EUR/USD pair. Major pairs are formed by the currencies of the major economies around the world being paired with the US dollar. These are EUR/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD, USD/CAD, and GBP/USD.
The USD/CNY (CNY = Chinese yuan) is another important major pair, but unfortunately it is controlled by the People’s Bank of China (PBOC), and because of that, trading it is quite difficult, as it depends on various other factors than the other major pairs.
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Look for the US News.
Based on the above, the US economic news is important for the major pairs. This makes the central bank, the Federal Reserve of the United States, the most important central bank in the world. The role of the dollar at the centre of the financial system as we know it makes the Federal Reserve look like the world’s bank; and in fact, in a way, it is. When setting the interest rate on the dollar, the Federal Reserve must consider factors outside the US economy. To put this into perspective, according to an International Monetary Fund (IMF) study, the dollar debt in the world jumped five times in the last 10 years. If the Fed starts a tightening cycle (which can be in place already), the interest rate rises; and the effects will be seen not only on the US economy, but all over the world. Those loans will need to be paid back with a higher interest rate. This makes monetary policy a powerful tool in the hands of central bankers, and understanding how it works gives some leverage in understanding how to trade major currency pairs.
Trading on Correlations
It is well known that the currency pairs are correlated. This means that the way one currency pair moves directly influences the way another pair moves. To give you an idea, think of the fact that there are always two major pairs and one cross. You just need to pick a cross pair (a pair that doesn’t have the US dollar in it); then simply by adding the US dollar to any of the other two currencies, you’ll end up finding the two corresponding major pairs. As an example, consider the EUR/JPY. This is a cross, but if you add the US dollar to the two currencies that make the cross, you’ll end up with two majors: the EUR/USD and the USD/JPY pairs, and these two majors are correlated. If one moves to the upside by 1%, and the other one moves to the downside by 1%; then the cross, the EUR/JPY pair, will not move at all, but will stay flat. On the other hand, if the EUR/USD jumps 1% and the USD/JPY falls by half a percent, the EUR/JPY cross will only show the difference between the moves the two majors made. These correlations are very important, because they lead to the possibility of trading a currency pair without looking at a chart.
Let me give you an example. Let’s suppose you’re bullish on the EUR/USD. At the same time, a specific pattern on the USD/JPY points to a bullish outcome as well. What is the best trade to take? For sure, it will not be the EUR/USD or the USD/JPY, but the EUR/JPY cross, because if the two majors are bullish, the EUR/JPY will be the one that will simply explode higher. This can be done without even looking at a chart, as the market as we know it constructs it this way. In conclusion, a major is a pair that influences the overall market, simply by virtue of the fact that the US dollar is part of it and that it is paired with another major currency pair.
Recommended Further Reading
- Why Trade with a Regulated Forex Broker?
– What regulation is for a brokerage house; why it is important; things to look for, such as how to check whether the broker is telling the truth, etc.
- Benefits of Mobile Forex Trading
– Pros and cons of mobile trading, highlighting the net benefits of it.
- Explaining Commissions in Forex Trading
– What type of Forex trading accounts are subject to paying commissions; what it means; and whether this a good or a bad thing.
- Opening a Live Trading Account
– Steps to open a live trading account with a Forex broker, starting with the time taken for the whole process, documentation to be sent, verification process, trading platforms to download, etc.
- What are “Lots” in Forex Trading
– Explaining the concept of a lot in Forex trading; and from that heading to micro-lots, different trading accounts, and broker’s limitations.
- Volume and Slippage – the Value of a Pip, and Execution Types
– Execution is important to every Forex trading, and this article deals with the difficulties in trading big volumes with little or no slippage.
Other Educational Materials
- “Contagion and trade: Why are currency crises regional?.” Glick, Reuven, and Andrew K. Rose. Journal of International Money and Finance, 18, no. 4 (1999): 603-617.
- Estimating the effect of currency unions on trade and output. Frankel, Jeffrey A., and Andrew K. Rose. No. w7857. National Bureau of Economic Research, 2000.