Trading in forex markets has emerged as the preferred choice for people interested in making money through online trading platforms. In the last decade, prop firms have provided a good platform for talented traders who are capable of using significant trading funds without putting their own money at risk. However, an often overlooked aspect for traders is the selection of the appropriate forex pairs for trading. Knowledge about the distinctions between major and minor forex pairs is essential for effective forex trading.
In this article, we shall examine the concepts of major and minor forex pairs, along with their pros and cons.
Forex Pair Basics
Currencies are traded in pairs in forex trading, whereby you buy one currency while selling another. Examples of forex pairs include:
- EUR/USD
- GBP/USD
- USD/JPY
Here, the first currency is referred to as the base currency, whereas the second one is the quote currency.
The value of the most traded forex pair keeps changing all the time as a result of news, interests, inflation, and market sentiments. It’s important to concentrate on finding the best pairs for your trading.
Major Forex Pairs Explained
Major forex pairs refer to the most active currency pairs in the world. They always contain the US dollar, which ensures liquidity and low spreads on these pairs.
The major forex pairs that trade the highest volumes include:
- EUR/USD
- GBP/USD
- USD/JPY
- USD/CHF
- AUD/USD
- USD/CAD
- NZD/USD
All these pairs have high trading volumes since they involve powerful and reliable economies.
Characteristics of Major Forex Pairs
Liquidity
A lot of trades are conducted on major pairs every day. Hence, there will always be buyers and sellers who can facilitate a transaction.
Low Spreads
With high volumes, brokers and prop houses will often give you better spreads on major pairs. Low spreads cut down on costs and increase your profit.
Stable Price Movements
Compared to exotic or highly volatile pairs, major pairs experience stable price movements, making them good choices for beginners and funded traders.
Analysis
It is easier to analyze major pairs due to the large amount of information about them.
Benefits of Trading Major Currency Pairs in Prop Firms
Easier to Overcome Difficulties
Prop firm traders usually trade major currency pairs since they offer consistent price movement and reduced costs of trading. This makes it easier to meet profit goals.
Less Risk during Economic News Releases
Even though major currency pairs experience significant price volatility due to economic news releases, their liquidity makes the occurrence of wild price movements highly unlikely.
Scalpers’ Choice
Most prop firms permit scalping trades on major pairs due to the low spread and fast order execution process.
Good for New Traders
New traders usually begin by trading the EUR/USD or GBP/USD pairs due to their simplicity.
Definition of Minor Currency Pairs
A minor currency pair is also referred to as a cross-currency pair because there is no inclusion of the US dollar here. The currencies involved in these currency pairs remain global but without the US Dollar.
List of minor currency pairs includes:
- EUR/GBP
- EUR/AUD
- GBP/JPY
- AUD/JPY
- EUR/JPY
- CHF/JPY
Characteristics of Minor Forex Currency Pairs
Increased Volatility
The currency pair may have higher volatility due to economic events taking place in either economy.
Wide Spreads
As a result of less trading activity, spread is wider compared to that of the majors. It becomes more expensive to trade the minor pairs.
Special Trading Opportunities
There are unique trading opportunities that arise when one economy performs better than the other.
Independent of the US Dollar
Many traders like minor forex currency pairs as they are independent of the USD economy.
Minor Pairs Benefits in Prop Trading
Clearer Trend Movements
Occasionally, minor pairs have stronger trending tendencies than major pairs, which is a bonus for traders relying on trend trading methods.
Greater Diversification
Dealing with minor pairs enables traders to diversify themselves from the USD-denominated pairs.
More Suitable for Seasoned Traders
Skilled traders frequently make use of minor pairs in order to capitalize on volatility and inefficiencies.
Risks Involved with Trading Minor Forex Currency Pairs
Higher Costs of Trading
Higher spreads might negatively impact profits, particularly for scalpers and high-frequency traders.
High Volatility
The minor currency pairs tend to become volatile due to their low liquidity.
Complex Analysis Required
Traders need to be familiar with various economies rather than just the US one.
Which Forex Pairs Should Prop Firms Trade?
This will depend on the level of experience, strategies employed, and risk appetite of the trader.
Major Forex Pairs Work Best for Beginners
Most novice traders at prop firms deal in major forex pairs due to the following reasons:
- Simpler to comprehend
- Lower spreads
- Easy risk management
- Smooth price movement
EUR/USD is one of the top forex pairs that are actively traded due to its liquidity, stability, and cost-effectiveness.
Minor Forex Pairs for Experienced Traders
Forex traders with a good knowledge of technical analysis will find minor pairs attractive due to their volatility and profit potential.
However, prop firms set strict drawdown rules, and hence experienced traders need to be extra cautious when trading volatile crosses such as GBP/JPY.
Ideal Trading Strategies for Major and Minor Pairs
Scalping
Scalping is most effective on major pairs since narrow spreads minimize expenses.
Some commonly used scalping pairs include:
- EUR/USD
- GBP/USD
- USD/JPY
Day Trading
Day trading may be possible using both major and minor pairs, depending on market situations.
Swing Trading
Minor pairs are frequently ideal for swing trading since they have the potential to develop strong trends over extended durations.
Swing trading strategies are commonly employed by traders using currency pairs such as EUR/JPY and GBP/JPY.
Tips for Risk Management for Prop Firm Traders
Do Position Size Correctly
Always be careful with risking funds on one particular trade. Some funded traders risk just 1% per trade.
Do Not Overtrade
Trading many currency pairs may lead to more stress and decreased concentration.
Know Market Sessions
Some forex currency pairs are more volatile in some market sessions:
- London session: EUR and GBP pairs
- New York session: USD pairs
- Asian session: JPY and AUD pairs
Watch Out For Economic News
Some economic news releases such as interest rate changes and inflation rates can greatly affect both major and minor currency pairs.
The Combination of Major and Minor Pairs
Some prop traders include both major and minor forex pairs in their strategy. Here’s an example:
- Major pairs can be used for daily consistent income
- Minor pairs can be used for higher-risk and high-reward trades
Conclusion
The knowledge about major and minor forex pairs is vital for prop firm trading. The use of major forex pairs is recommended to create a safe environment and gain stable income for novice traders. If you have enough experience and advanced skills in technical analysis, minor pairs may be a good choice.
As a rule, funded traders should start trading with the most popular and widely traded forex pairs. With time, when your skills become better, you can shift your focus to minor pairs and use more aggressive swing trading strategies.
The secret of successful trading in prop firms lies not only in finding the best setups. It’s important to choose the right forex pairs and keep yourself within acceptable risk levels.