Forex trading is a dynamic world with various factors involved. For forex trading for beginners and experienced traders, understanding these dynamics is important. These factors include market trends, real-time data analytics, and currency pairs. Traders need to understand these factors for growth and success.
As a trader, you must equip yourself with a comprehensive understanding of trading rules. By studying currency pairs like EUR/USD, GBP/USD, and commodities like XAUUSD, you can achieve profits.
This article explores types of currency pairs. It will majorly look at major, minor, and exotic currency pairs and how they function in the forex market.
What is a Currency Pair?
A currency pair is considered a price quote between two different currencies in the foreign exchange market.
The first listed currency within a currency pair is called the base. The second currency, which is the benchmark, is called the quote.
Major currencies are currencies that are most often traded against the U.S. dollar, such as EUR/USD, AUD/USD, and USD/CAD.
Understanding Currency Pairs
Trading currency pairs are often conducted in the foreign exchange market. The forex market enables the buying, selling, and conversion of currencies for international trade and investing. The forex market is open 5 days per week, 24 hours a day.
Forex trading involves the constant purchase and sale of currency. When buying a currency pair, investors purchase the base currency and sell the quoted currency. The bid price represents the amount of quote currency needed to receive one unit of the base currency.
On the other hand, when the currency pair is sold, the investor sells the base currency and receives the quote currency. Thus, the selling price of the currency pair is the amount one will receive in the quote currency for providing one unit of the base currency. When trading currencies, investors are selling one currency in order to buy another.
Base Currency:
The base currency is the first currency in the currency pair’s quotation.
Quote Currency:
The second part of the quotation is the quote currency.
How these Currency Pairs are Represented
Currency pairs are often presented as 6 letters with a dash – AAA/BBB. In this case, AAA is the base currency, while BBB is the quote currency.
Types of Currency Pairs:
There are three major types of currency pairs.
- Major Currencies
- Minor Currencies
- Exotic Currencies
Below is the breakdown of how these currencies work and what these currencies are.
Major Currency Pairs:
Definition:
The major currency pairs are the most traded in the foreign exchange market.
Types of Major Currency Pairs:
These are major currency pairs in the forex market:
- EUR/USD (Euro and U.S. Dollar)
- USD/JPY (U.S. dollar and Japanese yen)
- GBP/USD (British Pound and U.S. Dollar)
- USD/CHF (U.S. dollar and Swiss franc)
- USD/CAD (U.S. dollar and Canadian dollar)
- AUD/USD (Australian Dollar and U.S. Dollar)
- NZD/USD (New Zealand Dollar and U.S. Dollar)
The first five currency pairs are all among the top eight of the most traded currencies in the world. Approximately 80% of forex trades involve the U.S. dollar or more.
Minor Currency Pairs:
Definition:
The currency pairs that are not associated with the U.S. dollar are called minor currency pairs. These pairs have wider spreads and less liquidity.
Types of Minor Currency Pairs:
These are minor currency pairs in the forex market:
- EUR/GBP (Euro and British pound)
- GBP/JPY (British Pound and Japanese yen)
- EUR/CHF (Euro and Swiss franc)
- EUR/AUD (Euro and Australian dollar)
- AUD/NZD (Australian Dollar and New Zealand Dollar)
Minor currency pairs involve two other major currencies or a major currency with a currency from a smaller or emerging economy.
Exotic Currency Pairs:
Definition:
Exotic currency pairs usually consist of one major currency and one currency from a smaller traded economy.
Types of Exotic Currency Pairs:
These are exotic currency pairs in the forex market:
- USD/TRY (US Dollar and Turkish Lira)
- USD/SGD (U.S. Dollar and Singapore dollar)
- USD/ZAR (U.S. Dollar and South African Rand)
- USD/HKD (U.S. Dollar and Hong Kong Dollar)
- USD/PLN (U.S. Dollar and Polish Zloty)
These include currencies of emerging markets. In these pairs, the spreads are much wider, and liquidity is low.
Factors that Impact Currency Pairs:
The following are several factors that affect currency pairs:
- Interest rates
- Gross Domestic Product (GDP)
- Federal Reserve’s actions
- Other economic announcements
Considering these factors helps you execute trades well and earn profits. These factors influence the market and impact your performance.
Conclusion:
Currency pairs are the most important part of the Forex trading journey. You exchange one currency in place of another to make a profit.
Effective risk management, a solid trading plan, and advanced platforms help you execute better trades. These platforms are cTrader, Match-Trader, and TradeLocker.
If you are looking for how to make money online, forex trading might be the right choice.
Take the first step and start your journey now!