Understanding how and when to trade minor or exotic currency pairs is an essential skill for any developing forex trader. In this article we’ll explore exactly what constitutes a minor pair, the advantages and disadvantages of trading them, as well as how to time your trade to get the greatest chance of upside while managing risk.
Definition Of A Minor Currency Pair
A minor currency pair is a cross between two major currency pairs excluding the US dollar. This is in contrast to a currency cross, which is simply any pair that does not include the US dollar. To clarify, all minor currency pairs are also currency crosses, but not all currency crosses are minor forex pairs. Minor currency pairs must be made up of crosses including the British pound (GBP), the Japanese yen (JPY) or the euro (EUR).
Examples Of Minor Currency Pairs
EURGBP – Euro/British pound
EURAUD – Euro/Australian dollar
EURNZD – Euro/New Zealand dollar
EURCAD – Euro/Canadian dollar
EURCHF – Euro/Swiss franc
Japanese yen Crosses:
EURJPY – Euro/Japanese yen
GBPJPY – British pound/Japanese yen
AUDJPY – Australian dollar/Japanese yen
NZDJPY – New Zealand dollar/Japanese yen
CADJPY – Canadian dollar/Japanese yen
CHFJPY – Swiss franc/Japanese yen
British pound Crosses:
GBPAUD – British pound/Australian dollar
GBPNZD – British pound/New Zealand dollar
GBPCAD – British pound/Canadian dollar
GBPCHF – British pound/ Swiss franc
Trading The Minor Pairs: Advantages
Minor currency pairs are used by traders because of their ability to provide low-risk high-reward trade setups that play out over the long-term. Such trading opportunities are ideal for the medium-term to long-term trader, although less suitable for the day trader.
Despite the fact that the major currency pairs are the most liquid forex pairs, minor currency pairs also have significant trading volume which make them suitable as trading instruments. Indeed, some of the major crosses have an average daily volume that is much greater than that of some stock exchanges.
Furthermore, given that most traders focus on trading the major currency pairs regardless of their price action, the minor currency pairs can provide excellent opportunities for the more discerning trader. Many of the traders who trade the minor forex pairs look for high probability trade setups that might not be present in the major currency pairs.
Trading The Minor Pairs: Disadvantages
Minor forex pairs are not without their challenges. They are generally less liquid than the major currency pairs and as such they typically come with wider spreads. This can be challenging for some day traders, who rely on the low spreads offered on major currency pairs to make their profits through strategies such as scalping. The high spreads associated with most minor pairs can therefore quickly erode their potential profits.
The low liquidity associated with some of the minor pairs can also on occasion lead to delays in obtaining prices in the market. This can cause significant losses if you are trying to get out of a losing trade. The lower liquidity can also lead to more frequent order slippage, which could significantly reduce your profits.
The Best Time To Trade The Minor Currency Pairs
Although the forex markets are open 24 hours a day, five days a week, there are three 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: 23:00 GMT — 08:00 GMT
- The European/ London session: 07:00 GMT— 16:00 GMT
- The American/ New York session: 12:00 GMT— 20:00 GMT
The Asian session includes markets such as New Zealand, Australia, Singapore and China. Many traders typically avoid this trading session due to the low liquidity associated with it as only the Asian markets are open. However, currencies such as the Japanese yen, the New Zealand dollar and the Australian dollar can make significant moves during this session.
The European session is represented by the London financial markets. The London session accounts for about 30% of all forex transactions and is the most volatile session due to the large number of transactions that occur in this period. Volatility is good for most price action traders who profit from changes in prices. The British pound, euro and Swiss franc are most active in this session.
The North American session is represented by the New York financial markets. The New York session overlaps with the London session and the overlap period usually features high liquidity and might offer good trading opportunities. The close of the American session generally marks the close of the forex markets.
Although minor currency pairs are generally less liquid than the major currency pairs, they can provide excellent trade setups for the discerning trader. However, day traders might have a hard time profiting from minor currency pairs due to the lower liquidity and larger spreads. Trading the minor currency pairs is best suited to medium-term and long-term traders who do not mind trading with higher spreads. Timing can also play a significant role in the profit potential of forex trades involving minor currency pairs.