The risk and sheer volatility of the forex market can be enough to scare away new comers. As with anything a good education is essential to be successful. Today Mike from FxMadness.com is going to cover the basics of forex pairs. Be sure to check it out and comment with your own forex experiences.
For most people starting to trade Forex, this market is synonymous with the US Dollar. It can be bought and sold against just about any currency on earth, traders are familiar with the so called "majors". It really is no surprise. After all this handful of currency pairs are most popular, quoted and widely known. They are also available on all trading platforms and the first ones new market participants usually try their hands on.
Importance of US Dollar (USD) is no accident. United States is the world's single most dominant economy and lion share of global trade is conducted using the green back. USD tends to be currency of choice during times of turmoil and central banks hold large parts of their foreign reserves in the Dollar denominated securities. All this makes USD a "de facto" world reserve currency. In spite of recent talk to the contrary, a viable alternative is yet to emerge. Dollar is likely to remain most traded currency for the foreseeable future
There is no formal definition of the term "majors", but they include pairs of the Dollar and currencies of other mature economies. Those are Eurozone, Japan, Great Britain and Switzerland, followed by Canada, Australia and New Zealand. Home page of every broker website shows quotes for these as EUR-USD, USD-JPY, GBP-USD, USD-CHF, USD-CAD, AUD-USD and NZD-USD, our "majors".
Just a look at a trading platform reveals presence of more instruments. Some are pairs of US Dollars and currencies of developing countries. These are referred to as "exotics". Example could be USD-ZAR (Dollar- South African Rand). Broker's offerings are rounded up by currency pairs which don't include the Dollar. They are called "crosses".
These could be any combination of currencies of developed countries as well as some of the emerging economies. The biggest brokers can have as many as 40 or more of crosses available. Not all of them are affordable or popular. Some are best left alone, due to high cost of trading and limited market makers. This leads to high spreads and slippage. Others, however, are comparable to any USD pair in terms of viability, and these are the ones that are best candidates for trading. In principle, they are combined of the Euro, British Pound, Swiss Franc, Japanese Yen, Australian Dollar, Canadian Dollar and New Zealand Dollar.
This is one of the best trading of all currency pairs, including the majors. Over last few years popularity of this cross and Forex trading in general, pushed spread of EUR-JPY to a very respectable 3-4 pips, depending on broker. At 3 pips it is comparable to even most liquid majors and keeps trading costs down. Also, it is very potent. Average daily range (how much it moves), as of this writing, exceeds both EUR-USD and USD-JPY by a healthy margin. This means that a move in this cross is bigger than in any of those two majors, creating potentially better trading opportunities. It is very liquid around the clock and popular in all time zones. Every broker has it available for trading. Definitely worth giving it a look.
Another Euro cross that is also very popular. In fact, by most accounts, it has higher volume that USD-CHF. Importance of EUR-CHF has been demonstrated lately by Swiss National Bank, when it chose to target this pair in its effort to weaken the Franc. While daily moves are not as big as EUR-JPY, spread is low making it an inexpensive instrument to trade. Massive liquidity protects against slippage, except for the most extreme market conditions, when nothing is sacred. Traders who prefer less volatility will like it. Great training cross for beginners
This cross moves the least of all Pound pairs, which makes it ideal for people who don't like excessive volatility and the beginners. Here the spreads are also competitive, currently at 3 pips on most platforms. With GBP making currency headlines very often, one should give it a second look. Few brokers offer it in reverse order, quoted as GBP-EUR instead of EUR-GBP. In this case spread goes up and trading costs increase, but average daily range is higher. This situation is very infrequent and most traders will never be exposed to it.
Pound-Yen and Pound-Swiss franc.
Two crosses that are favorites of speculators. Both GBP-JPY and GBP-CHF are very volatile, with 300 pips daily moves being nothing unusual. Especially in GBP-JPY. Spreads used to be very wide for these two pairs, but that has changed over last couple of years and they dropped to 5-6 pips during most market conditions and with majority of brokers. Due to extreme volatility, in relation to other currency pairs, beginners are better of staying away from them. However, once some experience is accumulated and confidence gained, there is nothing wrong with trying to trade them at reasonable leverage. Perhaps not for everybody, but great trading instruments nevertheless.
Australian Dollar-Yen and Canadian Dollar-Yen.
Like many other crosses, these two used to be expensive to trade. Not any more. Spreads for AUD-JPY and CAD-JPY are at a very affordable 4-5 pips. Both of them currently show bigger daily trading ranges than they respective pairs with the US Dollar. More movement means more opportunities. Traders who look at long term fundamental analysis will also find these crosses helpful. Very often they are used as a proxy for world trade and health of global economy. Canada and Australia are "commodities" economies, with their currencies expected to appreciate during time of growth. Opposite during contraction periods. That would mean longer term position trading. However, relatively large daily moves also make them attractive for more active trading.
These are but a few of the many crosses available for trading. Offerings vary from broker to broker, but the ones mentioned above are featured on trading platforms just about everywhere. In fact, it would be difficult to find one that doesn't include them. Crosses are growing in importance and popularity every single day. They not only diversify trading, but often present opportunities simply not available with Dollar pairs. Anybody who ignores them is missing out on total Forex experience. There is a world of possibilities outside the Dollar.
Mike trades currency crosses extensively, with many trades covered on his blog www.fxmadness.com.