As you probably know, forex is traded in currency pairs. This is a dynamic interplay of values, representing the exchange rate between the two currencies in the pair. The first one is called BASE currency, while the second one is QUOTE. The exchange rate indicates how much of the quote currency is needed to purchase one unit of the base currency.
For example, in the EUR/USD pair, the Euro (EUR) is the base currency, and the US Dollar (USD) is the quote currency. If the EUR/USD exchange rate is 1.20, it means one Euro is equivalent to 1.20 US Dollars.
Major Currency Pairs: The Cornerstones of Forex Trading
The most traded and liquid pairs in the Forex market are called the Majors. They typically include the world’s strongest and most stable currencies. The seven major pairs involve the US Dollar and one of the following currencies: Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD).
The major pairs are highly liquid and represent the essence of forex being the most liquid market in the world. Major forex pairs offer tight spreads and ample trading opportunities. They are a popular choice by novice and experienced traders alike, due to their stability and predictability.
Common major pairs are:
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CHF (US Dollar/Swiss Franc)
- AUD/USD (Australian Dollar/US Dollar)
- USD/CAD (US Dollar/Canadian Dollar)
- NZD/USD (New Zealand Dollar/US Dollar)
Exotic Currency Pairs: Unveiling the Uncommon
Exotic currency pairs involve one major currency and one currency from a developing or smaller economy. These pairs are characterised by lower liquidity, higher spreads, and increased volatility compared to majors. Exotics are often associated with higher risk but also offer the potential for greater rewards.
Examples of exotic currency pairs include:
- USD/SGD (US Dollar/Singapore Dollar)
- EUR/TRY (Euro/Turkish Lira)
- GBP/SEK (British Pound/Swedish Krona)
- USD/THB (US Dollar/Thai Baht)
Traders attracted to exotic pairs should exercise caution, as these markets can experience rapid and unpredictable price movements. For example, a Turkish Lira is known for its crazy moves. Yet, when done right, trading EUR/TRY brings serious rewards.
Choosing the Right Forex Currency Pairs: A Balancing Act
Selecting the appropriate forex currency pairs depends on various factors, including your risk tolerance, trading strategy, and market conditions. It also helps if you have insight into local economies and understanding what moves their currencies. It’s so much about fundamental analysis, strategy and experience. This is one of the reasons beginner forex traders tend to focus on Majors. Later on, they may venture into exotics for diversification and higher potential returns.
Summing up, mastering currency pairs is fundamental to success in Forex trading. Majors provide a stable foundation, while exotics offer opportunities for those willing to navigate increased risk. As you embark on your Forex and CFD trading journey, you will definitely find your perfect trading pair.
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