By Filip Dimkovski
Edited by Joel Taylor
Updated October 5, 2023.
Forex trading is a popular form of making a potential profit from the markets, where traders buy and sell fiat currencies on the global currency exchange. A key concept in forex is the idea of a currency pair, which consists of two currencies that are traded against each other.
When starting out in the world of forex trading, it can take time to figure out which currency pairs to focus on. After all, there are dozens of them to choose from. In today's article, we'll break down the difference between major currency pairs and minor currency pairs, and help you decide which ones are right for you.
Major Currency Pairs
The currency pairs that trade with the US dollar are referred to as major currency pairs. Since USD is the most traded currency in the world, these pairs are incredibly popular and highly liquid. Traders who are just starting out will typically focus on major currency pairs, as they tend to be the most predictable and have relatively low spreads.
Namely, the world of forex trading recognizes a list of seven currency pairs known as the "major pairs," which include:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
- AUD/USD
- USD/CAD
- NZD/USD
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Minor Currency Pairs
Also referred to as "crosses," minor currency pairs involve trading two large-cap currencies that don't include the US dollar. In contrast to major currency pairs, minor currency pairs are made up of a major currency and a less popular or less liquid currency. Because of this, it means that minor currency pairs are typically less volatile than major currency pairs, but their spreads are often wider.
These are some of the most commonly traded minor pairs:
- EUR/GBP
- AUD/JPY
- GBP/JPY
- EUR/CHF
Minor currency pairs can offer traders the opportunity to diversify their portfolios and take advantage of different market conditions in different countries. However, they can also be riskier than major currency pairs, due to their smaller liquidity and wider spreads.
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Major vs. Minor Currency Pairs
As you can probably assume, there are some significant differences between trading with major and minor currency pairs. Let’s go over them.
Liquidity
Liquidity is the current amount of cash in a currency pair, and it refers to how easy it is for a currency pair to be bought and sold on the market. Because major pairs include trading the US dollar and currencies of other major countries, they tend to have higher liquidity. In simple terms, it means that it's easier for traders to enter and exit trades with these pairs.
For example, if you wanted to enter a trade on the EUR/USD pair, you would be able to do so much more quickly than if you were trading the AUD/NZD pair, due to the greater liquidity of EUR/USD.
Spreads
If you’ve traded in the past, you might have noticed that the buy and sell price of an instrument is never identical. In the trading world, this is known as the spread, which is the difference between the buy and sell price of a currency pair. Namely, major currency pairs tend to have much tighter spreads than minor pairs, which can make them less risky but also less profitable.
For example, the EUR/USD pair typically has a spread of around 0.2 pips (1 pip = 0.0001), which means that if you buy the pair, you will pay 0.2 pips more than if you were to sell it. In comparison, a less liquid pair like GBP/NZD might have a spread of 20 pips or more, which can make it much riskier to trade but also potentially more profitable.
Volatility
Volatility is a measure of how much the price of a currency pair changes over time. In some cases, the price of a currency pair can be very volatile, meaning it moves quickly and unpredictably. Usually, major currency pairs have much lower market volatility than minor ones, which can make them more predictable and easier to trade. For example, the EUR/USD pair is typically much less volatile than the GBP/NZD pair. On the other hand, minor currency pairs offer traders the chance to take advantage of larger price movements, resulting in opportunities for potential profits.
Risk
It's important to remember that, as a whole, forex trading involves risk. So, it is up to the individual trader to decide which pairs best suit their needs.
As mentioned, major currency pairs are often a safer choice, as they tend to be much more predictable and have relatively low spreads. Minor currency pairs can offer traders the chance to diversify their portfolios and take advantage of different market conditions, which might lead to potential profits.
Trading With Major & Minor Currency Pairs
Depending on what approach to forex trading you choose, some currency pairs may be more suitable for you than others. As a general rule, major currency pairs are best suited to short-term or day traders due to their relatively low spreads and high liquidity.
On the other hand, minor currency pairs can be a good option for long-term traders or those looking to diversify their portfolios. This is because these pairs tend to have wider spreads and lower liquidity, making more difficult for short-term traders to make potential profits.
Nevertheless, things you should consider doing before trading with both major and minor currency pairs are to assess the market conditions, understand the risks involved, and have a well-put plan in place. By doing so, traders can significantly reduce the risks associated with trading and make sure they are making informed decisions.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT buy/sell ownership of the instrument itself
Key Takeaways
Choosing whether to trade major or minor currency pairs is always up to the trader. However, it is important to remember that different pairs come with different levels of risk.
Ultimately, when trading both major and minor currency pairs, it's important is to have a sound understanding of the market, an adequate risk management strategy, and a well-developed trading plan. By taking the time to research, prepare, and understand the currency pairs you are trading, you are more likely increase your chances of success.
