What makes popular markets so popular?
BY Chris Andreou|March 25, 2021
What makes some markets more popular than others? Why is it for instance that the main dollar pairs are favoured more than some obscure FX pairs? There certainly are plenty of markets to choose from. In this article, I will take a look at some of the most popular markets and explain the reasons for their popularity.
First of all, we need to understand that the markets are there because they have been serving institutional investors long before large crowds of retail traders got involved. Therefore it is the institutional appetite for highly liquid markets that also impacts the selection of markets the retail traders prefer to trade. Why is that? Let me explain.
Institutional investors trade in large quantities and need to be able to execute their orders efficiently. This means they are trying to trade in such a way that their impact on price is as small as possible. This is only possible in markets that are liquid. Therefore, institutional investors make these markets even more liquid by participating in them.
Markets like EURUSD, GBPUSD and USDJPY in Forex and S&P 500 in equity futures markets are very liquid and therefore good markets to trade for both institutional and retail traders.
How is liquidity relevant to retail traders? That’s because highly liquid markets have narrow spreads. High liquidity and narrow spreads mean that it is cheaper to execute a trade but also that you can always get a good price (even when trading large size). These are the very same reasons institutional traders also favour these markets.
High liquidity also means that these markets are not so volatile as some smaller and less liquid markets can be. This is a safety Factor. These markets are not likely to have strong weekend gaps and if they move to your stop there probably isn’t too much slippage. Slippage refers to the difference between your intended exit price (stop-loss price) and the actual price at which your stop-loss order is executed. High liquidity means that that are vast amounts of limit orders in the market. If the market moves to your stop-loss price and the stop is triggered the next limit order to fill your stop order is not far from your stop-loss price and the slippage is minimal.
This is why the major Forex pairs are so popular trading instruments. Trading is easier and less expensive in these currency pairs. Major Currency pairs are EURUSD, USDJPY, GBPUSD, AUDUSD, USDCHF, NZDUSD and USDCAD.
These currency pairs have some differences in their characteristics. Let’s take a look at some of these differences. EURUSD is so liquid it doesn’t make big moves. While GBPUSD tends to have little more volatility it is still a relatively liquid market. USDCAD is a popular market for those who also trade USOIL (WTI Crude). This is because the Canadian economy is highly dependent on the price of oil. Therefore if the price of oil appreciates the USDCAD currency pair tends to depreciate.
AUDUSD and NZDUSD are also known as commodity currencies. Because China is the second-biggest economy in the world and the main customer for Australian mining products the AUD USD pair is a good proxy for the Chinese economy the economic growth in the world. When China’s economy grows it buys raw materials from Australia and thus supports the Australian currency. NZDUSD has a strong connection with the Australian economy which explains the high correlation between these two pairs.
By experimenting and studying these markets in different timeframes you can find a selection of markets that fit your style of trading. Join our FREE webinars if you feel that you could do with some help in forming a trading strategy. I have provided a registration link below.
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