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Anyone who has a slight idea of forex trading knows how important currency pairs are. Whether you’re selling euros or buying dollars, you are simultaneously dealing with two currencies. But what exactly are currency pairs, and why do they matter so much? Let’s break it down.
Understanding Currency Pairs
Once you’ve understood what is forex, the next step is to learn how currency pairs operate. A currency pair compares the value of one currency to another. Currency pairs are listed in a specific format. For instance, in the USD/ EUR pair,
- USD is the base currency and,
- EUR is the quote currency
Trading currency pairs is facilitated by the foreign exchange market, the world’s largest and most liquid financial market. The foreign exchange market facilitates the buying and selling of currency pairs 24 hours a day, 5 days a week. Major forex market participants, such as hedge funds, commercial banks, and financial institutions, as well as retail and individual traders, buy one currency and sell another at the same time.
Major Currency Pairs
Some currency pairs are traded more than others, such as USD/EUR. Major currency pairs are the ones traded the most against the US dollar. Examples of major pairs include:
- EURO/USD (euro vs. the US dollar)
- USD/JPY (the US dollar vs. the Japanese Yen)
- GBP/ USD (the British pound vs. the US dollar)
- USD/CHF (the dollar vs. the Swiss franc)
- USD/CAD (the dollar vs. the Canadian dollar)
Major currency pairs have one thing in common: They have high liquidity and can be bought and sold quickly with tighter spreads. For example, the USD/EUR dominated the world of forex trading with a high daily trading volume.
The good news is that major currency pairs aren’t difficult to understand. Both novice and experienced traders can earn profits by learning how to trade major currency pairs.
Crosses Currency Pairs
Currency pairs that are not associated with the US dollar are called minor currency pairs or simply crosses. While not as heavily traded as major currency pairs, crosses can offer favourable liquidity. They also have wider spreads due to low to moderate demand.
Examples of minor currency pairs include:
- EUR/GBP
- GBP/JPY
- EUR/CHF
If you’re looking to trade between specific regions or economic zones, crosses can be quite profitable.
Exotic Currency Pairs
Currency pairs with one major currency (USD or EUR) and the other from a developing country are called exotic currency pairs.
Some examples of exotic currency pairs include:
- USD/TRY (the US Dollar vs. Turkish Lira
- EUR/SEK (Euro vs. Swedish Krona)
- USD/ZAR (the US Dollar vs. South African Rand)
- GBP/THB (British Pound vs Thai Baht)
Political events and economic shifts impact the currency exchange rates, making traders experience sharp and sudden changes. They may need to modify their strategies to stay on top of market conditions. However, with thorough market understanding and risk management, traders can earn profits.
