Forex trading is a dynamic and liquid market 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. A currency pair demonstrates the exchange between two currencies. By studying currency pairs like EUR/USD, GBP/USD, and commodities like XAUUSD, you can achieve profits.
This article explores the difference between currency pairs. These are major, minor, and exotic currency pairs.
What is a Currency Pair?
A currency pair is an exchange between two different currencies within the foreign exchange market. There are two types of currencies: a base currency and a quote currency.
Base Currency: This is the first currency in a currency pair. For example, in EUR/USD, EUR is the base currency.
Quote Currency: This is the second currency in a currency pair. The value of a base currency is determined by this currency. For example, in EUR/USD, USD is the base currency.
How do Currency Pairs work in the Forex Market?
Trading currency pairs are often conducted in the foreign exchange market. The forex market enables buying and 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 quote 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 to buy another.
The Difference – Major, Minor and Exotic Currency Pairs
The Forex market consists of three major currency pairs.
- Major Currency Pairs
- Minor Currency Pairs
- Exotic Currency Pairs
Let’s explore the differences in each currency.
Major Currency Pairs:
The major currency pairs are the most traded in the foreign exchange market. These currencies always have the USD in the pair. These pairs are ideal for traders due to the highest liquidity and tightest spreads.
Most Traded Major Currency Pairs
- 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)
Why Trade Major Currency Pairs?
- Predictable price movements.
- Low spreads.
- High liquidity.
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:
The currency pairs that are not associated with the USD are called minor currency pairs. Minor currency pairs are also known as cross-currency pairs. An example of a pair is EUR/GBP.
Most Traded Minor Currency Pairs
- 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)
Why Trade Minor Currency Pairs?
- Offer more volatility, making them suitable for higher profit potential.
- Ideal for seasoned traders.
- The competition is less from institutional traders.
However, these pairs have wider spreads and have less liquidity, adding slight risk.
Exotic Currency Pairs:
Exotic currency pairs are usually one major currency and one currency from a developing economy. These pairs can be risky due to low liquidity and more volatility.
Popular Exotic Currency Pairs
- 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 Złoty)
These include currencies of emerging markets. In these pairs, the spreads are much wider, and liquidity is low.
Why Trade Exotic Pairs?
- Suitable for seasoned traders.
- Offer more profit due to the volatile nature.
- Give opportunities to trade with emerging economies in the market.
However, it can be hard to predict these pairs due to decreased trading volume and wider spreads.
Factors Influencing the Currency Pairs:
The following are several factors that influence the movement of currency pairs:
- Interest rates
- Gross Domestic Product (GDP)
- Central bank policies
- Market Sentiments
- Geopolitical Events
Understanding these factors helps traders execute trades well and earn profits. Traders can make informed decisions when trading with these three categories of currency pairs.
Conclusion:
Currency pairs are the most important part of a Forex trading journey. You exchange one currency in place of another to make a profit.
It is important to know the difference between these currencies for better trading outcomes.
- Major currency pairs are stable with high liquidity.
- Minor currency pairs come with better trading opportunities.
- Exotic currency pairs provide high risk and high-reward potential.
Whether you prefer day trading or swing trading, understanding currency pairs will help you make better trading decisions. If you are looking for how to make money online, forex trading might be the right choice. Choose the best trading platforms like cTrader, Match-Trader, and TradeLocker for a seamless trading experience.
Take the first step and start your journey now!