If you are new to the complex world of forex trading, you have probably come across the terms “major” and “exotic” currency pairs and wondered what on earth they mean. And wanted to figure out if they are the VIPs or underdogs of the currency world. Right?
Well, not exactly, but they are close enough.
In fact, these are the currency pairs that rule the world of forex. Thus, understanding the types of currency pairs is one of the must-know basics, or you can say the fundamentals in the forex world. By understanding these types of currency pairs, you can make smarter decisions. Not only this, but you can also avoid any unnecessary risks and maybe even sleep a little better at night.
This becomes even more important when you are a beginner with little or no knowledge of how the forex market operates. In this blog, we will break down the concepts of major and exotic currency pairs to help you decide where you should put your money.
What Are Major Currency Pairs?
Major currency pairs are those currency pairs that are the best forex pairs to trade globally and always include the US dollar (USD) on one side. For example, EUR/USD, GBP/USD, and USD/CAD.
Now, you must be thinking, why are they called majors?
The simple answer is that it is because they dominate the forex market in terms of volume and liquidity. In a span of a day, these pairs are traded millions of times, and this means that you can easily get in and out of trades without much hassle.
And why do traders trade major currency pairs?
These advantages make major currency pairs a popular choice among traders:
- High liquidity: The major currency pairs are traded every millisecond in huge quantities, meaning they offer high liquidity. With such high volume, you won’t get stuck while everyone else is moving on.
- Lower spreads: Since they are traded more, the brokers mostly offer tighter spreads on these currency pairs, starting as low as $0.0 pips, meaning lower costs.
- Plenty of information available: The internet out there is flooded with information about these currency pairs. News, analysis, predictions or whatever you name. With such information, you will never be left in the dark.
Are there any cons of trading these currency pairs?
Yes! Just like other currency pairs, they also offer some disadvantages, which every trader must know before jumping into the major currency pairs trading.
Some of them are:
- Lower volatility: Some traders love fast price movements, and not usual, but at times, the major currency pairs might feel slow compared to more volatile options.
- Heavily influenced by economic events: There are a lot of economic events that influence the price of the major currency pairs. From Interest rates, job data, to inflation news, all have an impact on these currency pairs.
What Are Exotic Currency Pairs?
Exotic Currency pairs are the combination of a major currency (like the USD or EUR) with a currency from a smaller or emerging economy. For example, USD/TRY and EUR/SEK.
It can be said that the exotic currency pairs are the offbeat combos of currencies, and traders love to trade them because of the following advantages:
- Higher volatility: Since the exotic currency pairs have the currencies from major economies, these pairs are believed to swing wildly sometimes, which means more opportunity for profit if you are quick and smart.
- Less competition: Since fewer people trade these, you might find unique trends that are not as exploited.
The cons?
Some of the disadvantages of trading exotic currency pairs are:
- Low liquidity: These are highly volatile, but there a fewer buyers and sellers means it can be hard to exit a trade quickly.
- Wider spreads: With lesser trading volume, the brokers usually have a wider spread on these currency pairs. Thus, these pairs are more expensive to trade compared to others.
- Higher risk: With the influence of political instability, sudden economic changes, and lower trading volumes, these currency pairs offer high risk.
Which Should You Trade?
Now that we are aware of both these types of currency pairs, let’s see which one you should trade.
So, honestly, the answer to this question depends heavily on your trading style, risk appetite, and experience level.
Here is what you should choose and why:
- If you are just starting, then you should stick with the majors without question. They’re relatively predictable and stable, and there are tons of educational material on them. As per the experts, forex trading for beginners should always start with majors. With this, you can get comfortable, learn the ropes, and gain confidence before exploring the wild side of this huge market.
- If you are a bit more experienced, then you can experiment with some exotic pairs. But don’t go all in! First, dip your toes. This means that you should try trading small positions, use stop-loss orders, and always stay on top of global news (especially for the countries involved in your exotic pair).
- If you are a thrill-seeker, then exotics might be your playground, without a doubt. But buckle up, as it is a bumpy ride. You will need solid risk management, lightning-fast reactions, and a thick skin to handle the unpredictability.
However, some of the traders prefer to mix it up. They stick with majors most of the time but take calculated risks with exotics when the setup looks just right. You can think of this as having a steady 9-to-5 job and a side hustle that might explode or even flop.
Exploring Other Markets
Once you’ve gained some confidence trading major or exotic currency pairs, you might want to explore other instruments like commodities. One of the most popular choices is crude oil due to its volatility and global importance. If you’re wondering how to trade crude oil online, it’s quite similar to trading forex you analyze price movements, use technical tools, and apply proper risk management. Just like currency pairs, timing, global news, and supply-demand factors play a huge role in oil price movements.
Conclusion
In Conclusion, there is no exact answer to which currency pair you should trade.
The answer depends on what kind of trader you are. (as explained above). It does not matter what you choose, just remember that the best traders are not the ones who trade everything. But, they are those who trade what they understand.
