Are you just getting started on your forex trading journey? If so, you’ll definitely want to know what currency pairs are.
When it comes to forex trading, you always deal with two currencies at a time. This means that when placing a buy trade, you’re simultaneously buying one currency while selling another in what’s known as a currency pair.
Let’s say you think that the US dollar is going to go down and you want to place a trade to take advantage of this opportunity. In this case, you’re going to need to sell USD against another currency through your broker.
As both currency pairs feature the US dollar, you could sell USD/JPY or buy AUD/USD. Your buy or sell direction will just depend on which currency is quoted first and which currency your analysis tells you will outperform the rest.
How currency pairs are quoted
A currency pair is always structured in the same way, following a universally accepted ranking order and always showing the value of a base currency (the first) being traded against a quote (the second) currency.
Take the EUR/USD currency pair as an example. We can see that the euro is ranked relatively higher than the US dollar and the quote will show how much a single euro is worth in US dollars.
There are three types of currency pairs that you need to be aware of, these being the majors, minors and exotics.
Major currency pairs
The major currency pairs are considered any market that features the US dollar. The majors are the most frequently traded currency pairs and are therefore the most liquid forex markets to trade.
As a forex trader, this liquidity means that the majors feature relatively stable prices and the lowest spreads – or brokerage costs – when taking a position in any of these currency pairs.
|Major currency pairs:|
|USD/JPY||US dollar/Japanese yen|
|GBP/USD||British pound/US dollar|
|USD/CHF||US dollar/Swiss franc|
|USD/CAD||US dollar/Canadian dollar|
|AUD/USD||Australian dollar/US dollar|
|NZD/USD||New Zealand dollar/US dollar|
It’s interesting to note that the US dollar is the world’s leading reserve currency and is involved in about 88% of currency trades globally. Drilling down one step further, the EUR/USD currency pair is the most heavily traded and therefore liquid currency pair in the world. If you’re going to open a forex trading account, this is the pair to start trading first.
Minor currency pairs
If a currency pair doesn’t feature the US dollar, it's considered to be a minor currency pair. The minors are sometimes called currency crosses because the market means you’re no longer required to first go through US dollars, as was once the case.
The minors aren’t as liquid as the majors, meaning you’ll see that they move more erratically and have wider spreads displayed on your forex trading account.
|Minor currency pairs:|
|AUD/NZD||Australian dollar/New Zealand dollar|
|GBP/JPY||British pound/Japanese yen|
|CHF/JPY||Swiss franc/Japanese yen|
|NZD/JPY||New Zealand dollar/Japanese yen|
|GBP/CAD||British pound/Canadian dollar|
The most widely traded minor currency pairs consist of pairs in which the individual currencies are also majors. Some of the more popular minors are EUR/GBP, GBP/JPY and AUD/NZD.
Exotic currency pairs
The final type of currency pair is known as an exotic. The exotics are essentially minors that feature currencies of emerging market economies.
The nature of emerging markets is that they’re less stable and much more illiquid as a result. This means that when it comes to trading exotic currency pairs, you’ll experience wild price swings and much wider spreads.
|Exotic currency pairs:|
|USD/HKD||US dollar/Hong Kong dollar|
|JPY/NOK||Japanese yen/Norwegian krone|
|NZD/SGD||New Zealand dollar/Singapore dollar|
|GBP/ZAR||British pound/South African rand|
|AUD/MXN||Australian dollar/Mexican peso|
Keep in mind that the wide spreads mean you may not see your trade executed at the price you expect. When you’re trading exotics, you need to make sure you know what you’re doing and manage your risk accordingly.
Which currency pairs should I trade?
Picking the right currency pairs to trade on your account depends on your experience as a forex trader. If you’re new to the game, it’s best to stick with the major and minor pairs. This is because the markets are much more stable and you’ll get lower spreads. Exotic pairs are more difficult to work with because they’re much more erratic and their low liquidity means you’ll see higher spreads.
Whichever currency pairs you decide to trade, simply make sure you’re managing your risk. It’s imperative to understand that while the opportunity for moves may be larger in the exotics, this also means that your risks are amplified if the market moves against you.
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