As you begin to learn Forex trading, the first thing to be called to your attention is the fact that currencies are never traded alone, they are always traded in pairs. You do not go to the Forex market and purchase a single currency. You rather trade one currency with another.
As an illustration, when you buy EUR/USD, you are selling the US Dollar and buying the Euro.
Currency pairs are typically subdivided into three major categories to facilitate easy work to traders:
- Major currency pairs
- Minor currency pairs
- Exotic currency pairs
Both currency pairs possess various characteristics which include the volume of trading, liquidity and volatility. These differences can assist traders to decide on the best pairs to use in their trade.
What Is a Currency Pair?
A currency pair is an expression of the value of a currency to another.
Each pair has two currencies:
Base currency -the initial currency in the pair.
Quote currency- Quote currency is the second currency in the pair.
For example:
EUR/USD = 1.1000
This is the equivalent of 1 Euro to 1.10 US Dollars.
When the price increases, this helps the Euro to be strong against the Dollar. The Dollar is becoming stronger should the price decline.
It is this dynamic nature of prices that brings about trading prospects in the Forex market.
Major Currency Pairs
The most commonly traded currency in the Forex market is major currency pairs. These pairs will always consist of the US Dollar and another main international currency.
Major pairs tend to have: because they are traded by banks, institutions and traders worldwide.
- High liquidity
- Smaller spreads
- More stable price movements
They are the easiest features to use and hence favorite among beginners.
Some of the popular major currency pairs are:
- EUR/USD – Euro / US Dollar
- GBP/USD -British Pound/US dollar.
- USD/JPY -US dollar/Japanese Yen.
- 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.
Of these, EUR/USD is the most traded international currency accords.
Minor Currency Pairs
Cross currency pairs are also known as minor currency pair. These groups exclude the US dollar but they nevertheless deal with major world currencies.
Minor pairs are exchanged not as much as major pairs, however, they are very popular among numerous traders.
Examples of minor currency pairs would include:
- EUR/GBP – Euro / British Pound
- EUR/JPY – Euro / Japanese Yen
- GBP/JPY- British Pound/Japanese Yen.
- AUD/JPY -Australian Dollar/Japanese Yen.
- EUR/AUD Euro / Australian Dollar.
Minor pairs can contain slightly bigger spreads and occasionally greater price dynamics than their major pairs.
Exotic Currency Pairs
Exotic currencies exchange involve one major currency and the currency of a smaller economy or a developing economy.
The frequency of trade of these pairs in the Forex market is lower hence these pairs tend to have:
- Lower liquidity
- Larger spreads
- Higher volatility
Examples of exotic currency pair may include:
- USD/TRY -US dollar/ Turkish Lira.
- USD / ZAR -US Dollar/ South African Rand.
- USD/THB – US Dollar / Thai Baht
- EUR/TRY – Euro / Turkish Lira
Exotic pairs are typically more dangerous to beginners because they have a higher speed and a larger spread since the latter ones are typically larger.
What Are the Best Currency Pairs to Speculate on?
As a beginner, one normally finds it good to begin with the major currency pairs.
They are more convenient to trade as they are highly liquid and less expensive to trade. Major pair news, analysis, and information are also available in greater amounts.
Which Currency Pairs Are Best for Beginners?
For most new traders, major currency pairs are the safest place to start.
They offer several advantages:
- High liquidity
- Smaller spreads
- Plenty of trading information available
- More stable price behavior
Pairs like EUR/USD, GBP/USD, and USD/JPY are often recommended for beginners who are learning how the Forex market works.
Once traders become more comfortable with the market, they may start exploring minor pairs and eventually exotic pairs.
Final Thoughts
It is a significant step to understand major, minor, and exotic currency pairs that a person studying Forex trading must know.
Large pairs are the most demanded as they are the most liquid and spreads are reduced. Minor pairs come with more opportunities but can be slightly expensive to trade. Exotic pairs are pricier and normally traded by more professional traders.
A good beginning point would be to understand how to begin with the appropriate currency pairs and know their behavior to eventually develop an understanding of trading.
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