Traders Minority Report
Learning to trade is to understand how minor currency pairs work as it is an essential skill for any developing trader. Today we will explore what are minor pairs, it's advantages and disadvantages when trading them as well as understanding the risk at hand.
Minor Currency Pair
It is a cross between 2 major currency pairs excluding the US dollar. Being a contrast to currency cross, which is basically any pair that does not include the US dollar. All minor currency pairs are also currency crosses, however not all currency crosses are minor forex pairs. Minor currency pairs are made up of crosses like the British pound (GBP) and the Japanese yen (JPY) or even the euro (EUR).
Examples of Minor Currency Pairs
Euro Crosses:
EUR/GBP – Euro/British pound
EUR/AUD – Euro/Australian dollar
EUR/NZD – Euro/New Zealand dollar
EUR/CAD – Euro/Canadian dollar
EUR/CHF – Euro/Swiss franc
Japanese yen Crosses:
EUR/JPY – Euro/Japanese yen
GBP/JPY – British pound/Japanese Yen
AUD/JPY – Australian dollar/Japanese yen
NZD/JPY – New Zealand dollar/Japanese yen
CAD/JPY – Canadian dollar/Japanese yen
CHF/JPY – Swiss franc/Japanese Yen
British pound Crosses:
GBP/AUD – British pound/Australian dollar
GBP/NZD – British pound/New Zealand dollar
GBP/CAD – British pound/Canadian dollar
GBP/CHF – British pound/ Swiss franc
These pairs provide traders with an ability of low-risk high-reward trade setups that play well over the long-term. Opportunities like these are ideal for medium and long-term traders rather than day traders.
The fact remains that major currency pairs have significant trading volume thus making them suitable as a trading instrument. With some of the major crosses having better average daily volume than that of some stock exchanges.
Today most traders focus on trading the major currency pairs regardless of their price, despite minor currency pairs providing a great opportunity for trade. As most traders today that trade minor pairs are looking high probability trade setups that might not be present in the major currency pairs.
Minor forex pairs are not easy targets, having less liquid than their major currency pair sisters they typically come with wider spreads. Could prove challenging for those that rely on low spread especially to those who make their profits with strategies like scalping on the major currency pairs. Minor currency pairs are known to be associated with high spreads hence it can quickly erode their potential profits.
With low liquidity surrounding some minor pairs, it could also lead to delays in obtaining prices from the market. Thus causing significant losses if you are looking to get out of a losing trade. Having lower liquidity could lead to more frequent order slippage, eventually significantly reduce your profits.
The market opens 24 hours a day, 5 days a week. Here are 3 major trading sessions associated with the open and close of different financial markets across the globe.
The main trading sessions are:
The Asian/ Tokyo session
The European/ London session
The American/ New York session
The Asian session is considered to run from 23:00 GMT to 08:00 GMT and avoided by traders due to the low liquidity. However significant moves are found in this session for currencies like the Japanese yen, the New Zealand dollar and the Australian dollar.
The European session generally runs from 07:00 GMT to 16:00 GMT. Represented by the London financial markets its sessions account for about 30% of all forex transactions and is volatile due to a large number of a transaction occurring during this period. Home to the British pound, euro, and Swiss franc.
The North American session runs from 1200 GMT up to 2000 GMT. Based out of New York, their sessions overlap London with features like high liquidity they might offer good trading opportunities. The close of the American session generally marks the close of the forex markets.
Conclusion
Yes, they are generally less liquid than that of major currency pairs however they can prove to be excellent trade setups. Giving a hard time for day traders, trading minor currency pairs is best suited for those who love the mid to long-term game plan that doesn't mind higher spreads. As a reminder timing plays a key role when profiting on forex trades and don't forget to do your research before trading.
