While the Forex market is a global financial hub for the world’s currencies, several pairs command the most trades. If you want to be profitable in Forex trading, you should know what these currencies are, why they are so important, and the factors that can strengthen or weaken each.
There are four major Forex currencies available for trade. Like all currency trades, the value of these currencies fluctuates in response to one another.
It’s important to note that a “major currency” is not always the “most traded currency” when it comes to market shifts. These top four are just the most popular currencies that traders choose to trade, but they don’t always represent the most profitable or volatile pairs.
Why does this matter to you?
Traders choose those four major currency pairs because they’re the ones with the most volume in circulation. A currency pair with a high volume means that traders can easily enter or exit their trades no matter their position size. While it’s possible to start Forex trading with a live account with $100 dollars in it, a larger capital turns more profits.
Since these pairs will always have high market liquidity, it becomes easier for businesses to purchase and sell currencies or commodities without experiencing a significant dip in their value. This allows for more robust trading, less market slippage, and a higher rate of exchange.
What controls the movement of major currency pairs?
Since these currencies are free-flowing, they’re subject to the normal supply and demand for the particular currency. These are determined by a mix of economic factors from the currency’s country of origin, and other significant changes around the world. However, if you’re looking for a general list of things to watch out for, we can narrow these factors down to four:
Since Forex trading is a speculative market, any currency experiencing high volatility will generally attract more traders that buy small positions.
Inflation, GDP, market trends, and even employment rates all play a role in how a currency pair moves, especially if it is a high-value and high-liquid currency. Since a country’s economic status will often determine the actions of its banks, this allows traders to gain an insight into how the currency will behave and adjust their trade strategies accordingly.
Closely tied to a country’s economic performance is its political situation. The national government’s policies directly affect the economy. Political scandals, trade wars, and its soft power play a role in their currency’s market value.
Finally, the central banks have the ability to control the price of currencies by changing their interest rates. Banks don’t usually make this kind of change – unless the price movement of the currency can cause real economic damage – but they can cause increased demand for a currency, which attracts investors looking for higher yields.
Are there any other pairs?
Other currency pairs are available for Forex traders, but keep in mind that their values are determined by other factors aside from the four that were already mentioned. One category of currency pairs are the “commodity currencies” – so-called because they’re affected by the movement of commodity prices:
Another is cross pairs – currencies that don’t include the US Dollar:
If you want to trade with these currencies, a careful analysis of the factors which determine their movement is critical to avoid a loss. Because of the volatile nature of the major currency pairs, it falls on the trader to make rational and informed decisions about the potential risk vs reward of trading. You may decide to invest in a market with frequent movement for a quick profit, or play the long game by increasing your position in a strong currency pair and selling after a certain point.
However, the four major currency pairs are undoubtedly some of the best currencies to trade with, both for the experienced and the beginner Forex trader. With the proper trade strategy in place and a thorough analysis of what drives the currency you’re interested in, the chance for getting higher yields is never too far away.