Before you begin to trade binary options with currency pairs as the underlying financial instrument, it is important that you understand the main types of currency pairs and their trading implications. Currencies — Majors and Crosses Broadly speaking, currency pairs are split into two categories: majors and crosses.
Why Is Pairs Trading Exciting?
Because of their popularity, the major currency pairs have highly liquid markets that trade 24hrs a day every business day.
The high liquidity of the major currency pairs also means that spreads are extremely narrow. It is also worth noting that there is no official definition of a major currency pair; some people consider as few as 4 currency pairs as majors while some consider up to 8 or more.
In this case, the currency that appears first is the Pound, and this is known as the base currency while the US Dollar is known as the quote currency. All other currency pairs not in the majors category are known as minors or crosses.
How does forex trading work?
By definition, all currency pairs that do not involve the US Dollar as either the base or quote currency are crosses. While by their very nature the market for crosses is less liquid compared to the majors, within the crosses category there are some pairs that are more popular and liquid than others. Within crosses there is also a sub-category known as exotics; these are usually non-Western currencies involving, for example, the Mexican peso, Turkish Lira, Thai Baht, Singapore Dollar, and Hong Kong Dollar.
These exotic currency pairs have less liquid markets and thus higher spreads.
Perhaps the most watched event in currency trading is the decision by the Federal Reserve on the interest rate. This was seen recently in December when the Federal Reserves raised interest rates, leading to appreciation of the US Dollar.
It is also important to note that much of the currency movements occur before the official economic release itself, as most people have a good idea, or at least think they have a good idea of what the official economic release is going to be. Of course, if the market has incorrectly predicted an official economic release, then major movements post-release will often follow.
Trading the Majors and Crosses When it comes to binary options, it is more important to understand the basic characteristics of the what pairs to trade on binary options currency pairs first before delving into the crosses. Hence, as a beginner, it is wise to familiarize yourself by trading the major currency pairs first.
The reason for this is because the Euro, Pound, and Swiss Franc, being all European currencies, tend to be positively correlated.
Step 2: Pick a Currency Pair
Again, this id due to the positive correlation between the Euro, Pound, and the Swiss Franc. Also important to note: the Swiss franc is often considered a safe haven currency by traders in times of political unrest.
Learning Options Trading. What Are Binary Options
Another reason is that the Aussie and Canadian dollars are positively correlated due to both currencies being commodity block currencies, meaning that their economies, and hence their currencies, are highly commodity-based.
This pair is also very sensitive to East-West political sentiments. Recommended Brokers:.