Choosing a CFD to trade is very important. If you’re a new trader and you choose a symbol that’s less liquid, with higher spreads and higher volatility, the chances of you losing money are higher, other things being equal. This article outlines some key principles for choosing your first CFDs to trade.
Categories of symbols
Before talking about choosing a symbol to trade, we need to understand the basics of how symbols are classified. In many cases, there is a broad category of symbols, such as forex or indices, in addition to subcategories, such as minor forex pairs or major indices.
Forex is usually split into major, minor and exotic (also known as ‘emerging’) pairs. There is no universally accepted definition of what these categories include. Nonetheless, we can outline some general principles:
- Major pairs are those with the most traded currencies against each other. The most widely cited official designation is that of ESMA, which considers any pair with two of the US dollar, euro, yen, pound sterling, Canadian dollar and franc to be a major. Exness considers EURUSD, USDJPY, GBPUSD, AUDUSD, USDCAD, USDCHF and NZDUSD to be majors.
- Minor pairs (also known in older use as ‘cross’ pairs) are usually considered to be those that are neither majors according to ESMA nor those containing emerging currencies. For example, EURNZD and HKDJPY would usually be considered minor pairs.
- Exotic pairs are typically viewed as being those with emerging or rare currencies. They include symbols like EURZAR, GBPTRY, USDTHB and so on. Be aware that some exotic pairs have rare/emerging currencies on both sides, such as TRYZAR.
There are five other main broad categories of CFD:
- Metals, often divided into majors like XAUUSD, minors like XAUEUR and exotics like XAGAUD and XPDUSD (palladium-dollar)
- Energies: USOIL and UKOIL
- Indices, divided into majors like US30 and minors like AUS200
- Cryptocurrencies, often divided into bitcoin and altcoins (all other coins)
- Stocks (shares)
Choosing a CFD from these groups
As a general rule, new traders should start with forex majors when choosing a CFD. There is a number of reasons for this, including the following:
- Lower spreads: spreads are an important cost of forex trading. The bigger the spread, the lower the chances of making a profit (other things being equal).
- Suitability for scalping and daytrading: majors are suitable for relatively or very fast orders because of high volume and liquidity.
- Comparatively low volatility: apart from around the biggest news, volatility for pairs like EURUSD and USDJPY is lower than exotic pairs with the lira, peso, rand etc and much lower than cryptocurrencies or shares on average.
- More accurate analysis (generally speaking): a very large amount of statistics as well as news can make analysing pairs like EURUSD easier than many other instruments.
The top three majors
Euro-dollar is the most traded forex pair. This is partially because the European Union and the United States of America have the world’s largest two economies based on GDP. Many traders would argue that this is the best symbol to trade for a novice. Trillions of dollars in total volume are traded on this symbol every day. Sudden spikes and plunges are comparatively rare for EURUSD.
Dollar-yen is the second most traded pair, partially because of interest differentials. The yen has a negative rate of interest and the dollar has the most liquidity of any currency. USDJPY is the most traditional symbol used in the carry trade, but it’s also very important during times of crisis. Economic and geopolitical issues plus other global problems usually spur demand for the yen, which is one of the most important ‘safe havens’ along with gold.
Pound-dollar, more commonly known as ‘cable’, is similar to euro-dollar in some respects. The British economy is the 5th or 6th largest in the world depending upon how one measures. The UK also has a traditionally close relationship with both the USA and the EU, so trading volume is generally very high for this symbol.
Choosing a CFD beyond the majors
Sooner or later, most traders want to diversify at least somewhat away from the majors. When doing this, they typically consider the factors above like spreads and liquidity. What’s perhaps most important though at this stage is the level of knowledge a trader has of other instruments.
For example, a trader living in Thailand might choose dollar-baht (USDTHB) because this trader has more information about the baht’s fundamentals than many others. A trader living in the Gulf meanwhile might want to trade UKOIL because British light oil is a key benchmark for exports of crude from this region. The media in the Arabic-speaking countries of the Gulf tend to follow the price of oil and news affecting this very closely.
For more on the role of diversification in trading, check out this article. You can choose among more than 160 symbols in Exness’ MT5 platform, so you can experiment as much as you like on your demo account before you start trading a new instrument for real.
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Which are the three subcategories of CFDs on forex?CorrectIncorrect
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Generally speaking, it’s a good idea for a new trader to start real trading with minor indices.CorrectIncorrect
What is the most important consideration for a trader when expanding beyond the majors?CorrectIncorrect