When people talk about foreign exchange trading, they frequently think of the major currency pairs, such as the EUR/USD, USD/JPY, or GBP/USD. On the other hand, seasoned traders are aware that cross-currencies and minor currency pairs present opportunities for trading that are not found in other markets. The trading volumes of these pairs are typically lower when compared to those of the majors; however, they have the potential to offer greater volatility, overlooked trends, and distinctive diversification benefits. In the following paragraphs, we will discuss what minor currency pairs and cross-currencies are, as well as the benefits and difficulties associated with trading them, and the most effective strategies for discovering opportunities that are hidden from view.
Understanding Minor Currency Pairs and Cross-Currencies
What Are Minor Currency Pairs?
In foreign exchange, minor currency pairs, also referred to as minor pairs or simply “minors,” are pairs of currencies that do not include the United States dollar (USD). The Euro (EUR), the British Pound (GBP), the Japanese Yen (JPY), the Swiss Franc (CHF), the Australian Dollar (AUD), the Canadian Dollar (CAD), and the New Zealand Dollar (NZD) are some of the major currencies that are used to create these pairs.
What Are Cross-Currencies?
Many times referred to as “crosses,” cross-currencies are comprised of all foreign exchange pairs that do not include the United States Dollar. However, this category can also include exotic currency pairs that do not include the United States Dollar. All minor currency pairs are also considered to be cross-currencies.
The main distinction between these pairs and the majors is that they trade with different dynamics, as they are not directly affected by USD movements.
Why Trade Minor and Cross-Currency Pairs?
Although major currency pairs account for the majority of trading volume, trading minor and cross-currency pairs offers a number of advantages, including the following:
1. Diversification Benefits
As a result of the fact that many traders concentrate on the US dollar, major pairs are highly correlated. You can reduce your exposure to risks associated with the United States Dollar by diversifying your portfolio through the trading of minor and cross-currency pairs.
2. Higher Volatility
There are some minor pairs that have a higher volatility than major pairs, which can provide exceptionally good opportunities for profit investment. To give one example, the GBP/JPY currency pair is well-known for its significant price fluctuations, which makes it appealing to traders who favor high-risk, high-reward setups.
3. Opportunities in Less Efficient Markets
As a result of the fact that minor and cross-currency pairs receive less attention than major pairs, they have the potential to be less efficient. This means that price movements may be more influenced by technical analysis rather than being dominated by fundamental factors.
4. Reduced USD Dependence
Minor pairs trading allows traders to avoid being overly dependent on the United States Dollar (USD), which can be advantageous during times of economic uncertainty in the United States or when geopolitical events have an impact on the USD.
Challenges of Trading Minor Currency Pairs
Traders need to take into consideration the following challenges when dealing with minor and cross-currency pairs, despite the fact that these pairs present unique opportunities:
1. Lower Liquidity
The liquidity of minor pairs is typically lower than that of major pairs because minor pairs are traded less frequently. There is a possibility that this will result in wider spreads and increased slippage, particularly during off-peak hours.
2. Higher Transaction Costs
The spreads and commissions that brokers charge for minor currency pairs are typically higher than those that they charge for major currency pairs because of the lower trading volumes.
3. Increased Volatility Risks
However, volatility also increases the risk of sharp price fluctuations, which can lead to larger drawdowns if they are not managed properly. Profit opportunities can be presented by volatility, but that risk is also increased.
4. Limited Fundamental Information
When compared to news based on the United States Dollar, economic data and news reports for currencies other than the US Dollar may be more difficult to track, which makes fundamental analysis more difficult.
Strategies for Trading Minor and Cross-Currency Pairs
In order for traders to be successful in trading minor and cross-currency pairs, they need to modify their trading strategies to take into account the specific market behavior of these pairs. Some strategies that are successful in trading are as follows:
1. Trend Following Strategy
As a result of the fact that there is less liquidity, minor currency pairs frequently experience prolonged trends. It is possible to effectively capture long-term moves by recognizing strong trends and making use of momentum indicators such as the Moving Average Convergence Divergence (MACD) or the Average Directional Index (ADX).
2. Range Trading Strategy
There are some minor pairs that have a tendency to trade within well-defined ranges, such as the EUR/GBP pair. Market participants have the ability to profit from price fluctuations that occur within a channel by utilizing support and resistance levels.
3. Carry Trade Strategy
When one borrows money in a currency that has a low interest rate and then invests that money in a currency that has a high interest rate, this type of transaction is known as a carry trade. Carry trading is a strategy that can be profitable for long-term traders because there are some minor pairs that have significant interest rate differentials. Carry trading is a strategy that offers the potential to generate profits.
Example: If the Reserve Bank of Australia (RBA) has higher interest rates than the Swiss National Bank (SNB), traders might consider buying AUD/CHF to earn positive swap returns.
4. News-Based Trading
Since minor and cross-currency pairs can be significantly impacted by local economic reports, traders should monitor key economic indicators such as:
- Interest rate decisions
- Employment reports
- GDP growth data
- Inflation statistics
- Political and geopolitical events
5. Using Correlation Analysis
Understanding the correlation between minor pairs and major pairs can help traders make better decisions. For example:
- EUR/GBP often moves inversely to GBP/USD.
- AUD/JPY correlates with risk sentiment in global markets.
Best Practices for Trading Minor and Cross-Currency Pairs
To optimize your trading approach, consider these best practices:
1. Choose the Right Broker
Ensure that your broker offers competitive spreads, deep liquidity, and reliable execution for minor and cross-currency pairs.
2. Adjust Your Risk Management
Since minor pairs can be more volatile, use wider stop losses and adapt your position sizing accordingly. Risking no more than 1-2% of your account per trade is advisable.
3. Trade During Active Market Hours
The best time to trade minor pairs is when their respective regional markets are open. For example, EUR/GBP is most active during the London session, while AUD/JPY sees movement during the Asian session.
4. Leverage Technical Analysis
Given that minor pairs may have lower liquidity, technical analysis plays a crucial role in identifying patterns and entry points. Use tools such as:
- Fibonacci retracement levels
- Moving averages
- Bollinger Bands
- RSI and Stochastic oscillators
5. Monitor Sentiment and Macroeconomic Trends
Since minor pairs are influenced by global economic conditions, keep an eye on central bank policies, risk sentiment, and commodity price trends that can impact currencies like AUD, CAD, and NZD.
Conclusion
For foreign exchange traders who are willing to venture beyond the mainstream USD-based currency pairs, trading minor currency pairs and cross-currencies presents a world of hidden opportunities. Despite the fact that they are associated with greater volatility and wider spreads, they also provide diversification, the opportunity to follow trends, and distinctive market inefficiencies that can be exploited with the execution of the appropriate strategies. By employing both fundamental and technical analysis, effectively managing risk, and having a thorough understanding of the nuances of each pair, traders have the ability to discover profitable setups in this section of the foreign exchange market that is frequently overlooked.
Are you ready to explore minor currency pairs and cross-currencies in your trading strategy? Start by analyzing historical data, testing different approaches, and staying informed about global economic developments. Happy trading!
