Due to the latest developments in the currency space, retail traders should be considering major pairs, as a confluence of factors now facilitates proper short-term trading. These assets are covered by all major brokerages out there and come with several benefits, some of which will be discussed today.
Although the FX market has generally been outside the media’s attention for an extended period, this could be a place well-suited for some traders. Now that we see stronger activity across the board, here are the top 4 reasons why people should be focusing on major forex pairs.
#1 Risks related to emerging markets
Emerging economies were forced to borrow a lot in foreign currencies, especially USD, and as they need to balance their budgets, a risk of solvency emerges. Some emerging currencies, such as the Turkish Lira, are weakening to an alarming degree, but during 2021, the Dollar managed to strengthen against most emerging currencies.
Analysts at CAPEX.com believe the trend can further extend, if the Federal Reserve maintains its changing policy stance, reducing asset purchases and providing early hints for rate hikes.
#2 Major Currencies volatility on the rise
Traders have been migrating towards crosses or exotic pairs mainly because the volatility in major pairs was compressed. That’s no longer the case, as there are solid indications that activity is picking up in these assets.
Based on a recent report from BNN Bloomberg, currency volatility is soaring as traders consider the impact of the new Coronavirus variant. New risks might emerge in the near term, which could prompt market participants to price in new outcomes.
#3 Lower daily ranges can’t wreak havoc on traders’ psychology
Major currency pairs are more stable and that has positive implications on how traders can manage risk when holding open trades. When compared to exotics, fluctuations are mild, which means it is more comfortable for people to take calculated risks.
The importance of trading psychology is not to be doubted or undermined. More often than not, traders try to maximize their returns by getting involved in riskier assets, and even though those fluctuate more impulsively, it is also more difficult to design an efficient risk management strategy. Risks and returns are directly correlated and one should be aware that with major pairs, liquidity is very abundant, which makes sharp counter-trend moves less likely, although not impossible.
#4 Tight trading costs and more accurate execution
Another aspect that’s constantly being neglected by traders, according to CAPEX.com, has to do with trading costs. With major pairs, spreads are tight and trade execution is accurate mainly due to the fact that liquidity is high.
On the other hand, the costs associated with trading on exotic pairs are different, spreads are wider, and trade accuracy can be poorer. A wider spread means traders need to set a larger stop loss. Also, in case volatility spikes, spreads can increase even further and get traders out of the market early by triggering the stop loss.
