I wrote this article for City Traders Imperium which I’m republishing on my site because I think it’s a useful educational article on forex trading and particular, swing trading the main currencies. Tim
According to the Bank for International Settlements, international forex transactions in 2019 averaged an incredible $6.6 trillion a day.
While it’s true that dealings between global financial institutions account for much of that sum, these enormous and highly liquid markets still offer considerable opportunities for individual forex traders like us.
There are so many choices that even experienced traders can sometimes feel overwhelmed.
That’s why we need to focus our attention on the most likely sources of consistent profits – and that means the forex majors.
What are the Forex Majors?
The forex majors are usually defined as the four most heavily traded currency pairs in the global forex market – the EUR/USD, USD/JPY, GBP/USD, and the USD/CHF.
There’s an argument that the larger so-called “commodity pairs” – USD/CAD, AUD/USD, and NZD/USD, should also be regarded as majors. And it’s true that vast volumes of these pairs are traded every day.
But there are good reasons for traders, particularly new ones, to focus on just a few pairs.
Why Focus on the Major Currency Pairs?
So this article will deal only with how to trade the traditional “big four”.
The principal advantage of the majors is the high volume and liquidity they offer. This makes it easy to open and close huge positions with usually little or no slippage from target prices.
High trading volumes also lead to tight spreads between bid and ask prices, with consequently increased profitability.
Finally, the volume and liquidity offered by the majors make them generally less volatile and easier to trade than the more exotic pairs – particularly for inexperienced traders.
Why Swing Trade When Forex Trading?
The majors are the currencies of the largest economies in the world, traded in huge volumes by global financial institutions every day. So they often move sharply in response to fundamental economic factors such as changes in interest rates, trade balances, GDP, employment, and inflation.
Political factors such as elections, wars, and other international events, may also give rise to sharp and extended price movements. And these are often assisted by aggressive central bank interventions such as those seen during the 2008 financial crisis and COVID-19 pandemic.
Moves driven by forces of this enormous power frequently persist for days, weeks, or even months.
So, although it’s perfectly possible to day trade the majors – and many people do so very successfully – they are particularly well-suited to swing trading.
The only note of caution is that the responsiveness of these pairs to fundamental factors makes it essential for traders to keep a close eye on the news from around the world while their trades are open.
General Strategies for Swing Trading the Majors
That said, the big four currency pairs can be traded in the same way as any other pair or financial instruments such as stocks or commodities.
So traders who prefer to trade with the trend can look to use swing trading strategies such as bullish or bearish flags, pennants, triangles, or perhaps the cup and handle.
Those who like to trade trend reversals, or to catch changes of direction within a range, can look for head and shoulders patterns, double tops, and bottoms.
Whatever strategy is used, indicators such as Exponential Moving Averages (EMAs), Moving Average Convergence Divergence (MACD), Volume, and Relative Strength Index (RSI) can also be useful tools.
The precise combination of strategies and indicators to be used is mostly a matter of a trader’s personal preference, and there is no particular reason to favour one or another when trading the majors.
But there are some characteristics of each pair that traders need to be aware of.
Specific Information for Forex Trading the Major Currency Pairs
The Euro/United States dollar (EUR/USD) is the most highly traded of all currency pairs and the overlap between the European and American trading sessions typically provides for significant volume and momentum.
Trading between 1 PM and 4 PM GMT (8 AM and 11 AM US Eastern), when both European and US markets are open, is usually optimal in terms of volume and spreads.
This is when the big moves are likely to begin. But swing traders using a daily or 4 hour chart can be active outside these hours with some success.
Similar considerations apply to the GBP/USD pair, which is also the pair that tends to show the sharpest daily moves and is therefore particularly attractive to traders.
This volatility can be tricky for day traders. Still, it’s an advantage for swing traders who can take advantage of significant moves while ignoring much of the market “noise” generated on the 1 and 5-minute charts.
That said, tight risk management is essential when trading this pair, and traders often find that its price moves more in line with technical indicators than is the case with the other majors.
Just as inflation weakens a currency, deflation tends to strengthen it; so years of relative economic decline in Japan have paradoxically made its currency an attractive “safe haven” for large financial institutions and other investors.
This means that the yen will be subject to huge bullish pressure in times of economic instability and falling stock markets.
On the other hand, a strong Yen is the last thing Japan’s moribund and export-dependent economy needs. So the nation’s central bank has made repeated and aggressive interventions in the forex markets to drive down its value, thereby making their exports relatively (to other countries) cheaper.
Constant monitoring of the economic and financial news out of Japan is therefore essential for those who want to trade this pair.
Savvy private investors have always loved the Swiss Franc (CHF) as a hedge against inflation. And although the Swiss economy is in no way comparable with the Japanese, there are considerable similarities in their currencies.
Like the yen, the Swiss Franc is regarded as a safe haven, and it will tend to increase in value against the dollar and the other majors in times of economic turmoil.
But like the Bank of Japan, the Swiss National Bank is extremely wary of letting the Franc rise too high, especially against the Euro, and it never hesitates to sell huge sums to keep exchange rates in its preferred range.
None of this is to say that we should avoid the USD/JPY, USD/CHF, or the other majors.
Successful swing trading doesn’t require that we remain glued to our screens 24/7.
But it does mean that we have to pay constant attention to the fundamentals affecting each of these huge economies, and are ready to respond and adapt accordingly.
Combine this attitude with correct risk management, and the majors will offer us great profit opportunities every day.
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Tim Thomas has no positions in the stocks, ETFs or commodities mentioned.
Featured image credit: Unsplash.