In the vast world of forex trading, currency pairs serve as the backbone of the market. These forex pairs represent the quotation of two different currencies, comparing the value of one currency against the other. They play a crucial role in determining exchange rates and facilitating international trade. In this article, we will delve into the concept of forex pairs, exploring major, minor, and exotic pairs in a simplified manner.
Forex pairs consist of two currencies, where the first currency listed is called the base currency, and the second currency is known as the quote currency. The value of a currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency. For example, if the EUR/USD pair is quoted as 1.2500, it means that one euro can be exchanged for 1.2500 U.S. dollars.
Â
Currencies are identified by their ISO currency codes, which are three-letter alphabetic codes used in international markets. For instance, USD represents the U.S. dollar. Below you have an example:
Let’s explore the different types of forex pairs:
Major Forex Pairs
- Major Currency Pairs: Major currency pairs are the most frequently traded pairs in the forex market. They enjoy high liquidity and significant trading volumes. These pairs involve currencies from major economies and are considered highly stable. As a result, they attract a large number of traders. The following are examples of major currency pairs:
- EUR/USD: Euro against the U.S. dollar.
- USD/JPY: U.S. dollar against the Japanese yen.
- GBP/USD: British pound against the U.S. dollar.
- USD/CHF: U.S. dollar against the Swiss franc.
- AUD/USD: Australian dollar against the U.S. dollar.
- USD/CAD: U.S. dollar against the Canadian dollar.
Minor Fx Pairs
- Minor currency pairs, also known as crosses, do not involve the U.S. dollar. Instead, they consist of two major currencies. Although their liquidity may be slightly lower compared to major pairs, they still see active trading. Traders who have expertise in specific economies often trade these pairs. Examples of minor currency pairs include:
- EUR/GBP: Euro against the British pound
- GBP/JPY: British pound against the Japanese yen
- EUR/CHF: Euro against the Swiss franc
Â
Minor currency pairs allow traders to explore opportunities and trends within specific regions. They can be influenced by economic indicators and events specific to the countries involved.
Exotic Forex Pairs
- Exotic currency pairs involve currencies from emerging markets or smaller economies. These pairs have lower liquidity and wider spreads compared to major and minor pairs. Exotic currency pairs are traded less frequently and are more susceptible to market volatility. Traders with a higher risk appetite often engage in trading exotic pairs. Examples of exotic currency pairs include:
- USD/SGD: U.S. dollar against the Singapore dollar
- USD/ZAR: U.S. dollar against the South African rand
- USD/TRY: U.S. dollar against the Turkish lira
Â
Exotic currency pairs require careful analysis and consideration due to their higher volatility. Economic and political factors can have a significant impact on these pairs, making them attractive to experienced traders.
