Major Currencies In Forex Trading – Currency Pairs
The foreign exchange market joins the national currencies of two countries for trading, forming currency pairs. Each currency pair consists of a base currency and a quote currency. Base currency is the first listed currency and quote currency is the second currency. The currency pairs measure the value of one currency against another. The quote currency’s value is to indicate the amount in requirement to purchase one unit of the base currency. The forex market identifies currencies by their associated currency code in the international market, which is also referred to as the ISO code. For instance, the ISO code for British pounds is GBP.
The Forex market is the most volatile market in the financial world and involves buying and selling of currencies along with exchange and speculation. Forex trading is related to the simultaneous purchase and sale of currencies. Buying a currency pair in the forex market means buying the base currency and selling the quote currency. While selling a currency pair in the forex market, you sell the base currency and receive the quote currency.
Different Types of Currency Pairs
As the US Dollar is the most traded currency in the world, several currencies are traded against it. Currency Pairs can be categorized as-
1. Major Currency Pairs
The most heavily traded currency pairs in the forex market are the major currency pairs. This handful of currency pairs is actively traded in the forex market. The combinations of major markets form the major currency pairs. These are the most traded currency pairs representing the largest economies of the world and, are traded in high volumes. All the major currency pairs include the US Dollar. Taking the US Dollar as the benchmark, the currencies that trade the most volume against it are major currencies. The list of major currency pairs includes:
- The Euro and US Dollar- EUR/USD
- The US Dollar and Japanese Yen- USD/JPY
- The British Pound Sterling and US Dollar- GBP/USD
- The US Dollar and Swiss Franc- USD/CHF
- The US Dollar and Canadian Dollar- USD/CAD
- Australian Dollar and US Dollar- AUD/USD
- New Zealand Dollar and US Dollar- NZD/USD
These currency pairs are popular among speculators because of their large daily trade volume. EUR/USD is the most traded currency pair in the world. Also, the European Union and the US are the two largest economies in the world. The currency pairs involving the Canadian and Australian Dollar are commodity currencies because both countries are rich in commodities and are affected by their prices.
2. Minor Currency Pairs
The currency pair that involves a non-USD major currency pair is a minor or cross-currency pair. These currency pairs are not associated with the US Dollar. They have a slightly wider spread and are less liquid as compared to the majors. Euro, Great British Pound, and Japanese Yen. are the most common crosses. Pairs that involve Euro are called Euro Crosses, Yen is Yen Crosses and, those involving Pound are Pound Crosses. Minor currency pairs include all the other combinations of major markets. Some minor currency pairs are-
- Euro and British Pound- EUR/GBP
- British Pound and Canadian Dollar- GBPCAD
- British Pound and Japanese Yen- GBP/JPY
- 3. Exotic Currency Pairs
Exotic currency pairs involve one major currency and one currency of developing and emerging market economies. These currency pairs are not traded frequently like the majors and minors. These currency pairs are not very liquid and lack consistency in market activities. Due to low levels of liquidity, exotic currency pairs are more sensitive to geopolitical and economic events. Since exotic currency pairs are not widely traded, they involve higher trading fees and may be subject to unmanageable price fluctuations.
Some of the exotic currency pairs are-
- US Dollar and Hong Kong Dollar- USD/HKD
- Japanese Yen and Norwegian Krone- JPY/NOK
- New Zealand Dollar and Singapore Dollar- NZD/SGD
- Australian Dollar and Mexican Peso- AUD/MXN
So, there are different categories of currency pairs based on the volume and frequency of their trades. Trading currency pairs will give you the opportunity to make profits but it also requires regular research and patience.
