How to trade minor pairs
Learning how to trade minor pairs is a vital skill, especially for inexperienced, emerging traders. By understanding what constitutes a minor pair, the risks involved while trading them, and timing your trade to increase your chances of profitability while managing risk is a critical skill that no trader would want to wish away.
What constitutes a minor currency pair?
A minor pair is a major currency pair that doesn’t include the US dollar. Major pairs represent currencies from the world’s strongest and largest economies. Any currency couples from these countries that don’t have the US dollar in its componence is called a minor pair. Minor pairs consisting of the yen, the euro, and the British pound are the most widely traded. Some examples of minor pairs are:
- Euro/British pound (EUR/GBP)
- British Pound/Canadian dollar (GBP/CAD)
- Swiss franc/Japanese yen (CHF/JPY)
- Euro/Australian dollar (EUR/AUD)
- New Zealand dollar/Japanese yen (NZD/JPY)
- British pound/Japanese yen (GBP/JPY)
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The upside of trading the minor pairs
- Minor currency pairs may provide profitable trade opportunities that unfound over the medium-term to the long-term. Although such trading setups are less suitable for day traders, they are ideal for medium to long-terms traders who hold their position for longer periods.
- Minor currency pairs experience a substantial amount of trading volumes, making them suitable trading instruments due to their liquidity. Some minor couples experience daily trade volumes that exceed some stock exchange markets.
- Minor currency pairs provide opportunities that may not be present in major currency couples for intelligent traders. Despite nosediving price action in major currency couples, most traders still focus on trading them, but a discerning trader will look for new profitable opportunities on minor currency pairs when price action on major pairs is not working to their favor
The downside of trading minor pairs
- Compared to major currency pairs, minor pairs are less liquid and more volatile due to wider spreads. This is not good news to day traders and scalpers who bank on low spreads in major couples to earn a profit. Their potential gains can easily get eroded by the wider spreads associated with most minor pairs.
- Due to their low liquidity, minor pairs can occasion delays in obtaining market prices because there are fewer market participants to take the other side of your trade. If you are attempting to short a losing trade, such a delay can lead to significant losses. Lower liquidity also comes with order spillage, where your order is filled at a different price other than it was requested. Order spillage can further erode your gains.
When to trade minor pairs
For five days a week, the forex markets remain open for 24 hours a day. But the opening and closing of different financial markets across the globe have come to be associated with three major trading sessions as follows:
- The Asian/Tokyo trading session: This trading session occurs between 23: 00 GMT to 08:00 GMT. It affects markets such as China, Australia, New Zealand, and Singapore. Because it is only Asian markets that are open, many traders avoid it due to low liquidity. For a minor currency pair trader, this might be a session to watch because the New Zealand dollar, the Australian dollar, and the Japanese yen can move significantly during this period.
- The European/ London trading session: This trading session occurs between 07:00 GMT to 16:00 GMT, and it affects London financial markets. Large trade volumes occur during this session because it is the most volatile session, accounting for approximately 30% of all forex transactions. During this session, the Swiss franc, the British pound, and the euro are the most active currencies.
- American/ New York trading session: This trading session occurs between 12:00 GMT to 20:00 GMT, and affects New York forex markets. This session overlaps with the London session and offers excellent trading opportunities due to high liquidity.
In conclusion, minor pairs are less liquid than major pairs, but for the discerning trader, they can avail trade opportunities. Day traders may find it hard to profit from minor currency pairs because of low liquidity and wider spreads. However, the medium to the long-term trader who is comfortable trading with less liquidity and wider spreads is best suited for trading minor pairs. Also, time plays an essential role in determining the profitability of trades that involve minor pairs.