Foreign exchange is a global marketplace where companies, institutions, and individuals exchange over $5 trillion worth of currencies every day. On Forex, buying and selling currency is a simultaneous process; that’s why they are always traded in pairs. In this guide, we’ll delve deeper into major, minor, and exotic currency pairs, discuss how do Forex pairs work, and address how choosing the right one might affect your trade and boost performance.
The building block of Forex is currency pairs, which represent two different currencies traded against each other. The currency pair is split into:
- Base currency: primary currency you’re buying or selling.
- Quote currency: secondary currency you use to make the exchange.
Both base and quote currencies work in tandem, meaning you simultaneously purchase one and sell the other. If you buy a currency pair, you buy the base and sell the quote. If you sell a currency pair, you sell the base and get the quote. This process allows traders to profit from exchange rate fluctuations.
Here’s how it works in practice: if you’re trading EUR/USD, one of the major currency pairs on Forex, in this scenario, the euro is the base currency, while the U.S. dollar is the quote. If the EUR/USD exchange rate is 1.09, it means €1 is worth $1.09.
Understanding Major Currency Pairs
Major currency pairs are the most traded due to their large market and high liquidity. Although pairs may vary, five currencies make it into the list of major-league players, including the U.S. dollar, euro, British pound, Japanese yen, and Swiss franc. Generally, one can distinguish seven major Forex pairs, like:
- EUR/USD ― Euro/U.S. Dollar
- GBP/USD ― British Pound/U.S. Dollar
- AUD/USD ― Australian Dollar/U.S. Dollar
- NZD/USD ― New Zealand Dollar/U.S. Dollar
- USD/JPY ― U.S. Dollar/Japanese Yen
- USD/CAD ― U.S. Dollar/Canadian Dollar
- USD/CHF ― U.S. Dollar/Swiss Franc
As you’ve probably noticed, the U.S. dollar is present in all the major exchanges.
Major pairs are responsible for up to 75% of all trades. Forex is open round the clock during weekdays. If you want to boost your profits and improve your performance, consider using the free trading robot for MT4. Sophisticated trading algorithms minimize manual oversight and increase your precision and speed.
What Are Minor Currency Pairs?
Unlike major currencies, minor ones are a duo of major and minor currencies. Minor currencies are also known as crosses and represent currencies of a smaller economy not associated with the U.S. dollar. Here’s a look at some minor currency pairs:
- EUR/CAD ― Euro/Canadian Dollar
- GBP/JPY ― British Pound/Japanese Yen
- NZD/JPY ― New Zealand Dollar/Japanese Yen
Understanding Exotic Currency Pairs
Exotic currency pair consists of one major currency, like the U.S. dollar, and one pertaining to an emerging or smaller economy, like the Polish Zloty. For instance, here’s a look at some of the more common exotic Forex currency pairs:
- USD/ZAR ― U.S. Dollar/South African Rand
- USD/SGD ― U.S. dollar/Singapore dollar
How to Choose the Right Forex Pairs to Trade
With dozens of pairs available for exchange at any given moment, monitoring them all is challenging and counterproductive. Let’s look at the main factors that will help you focus your attention on a selected few currency pairs.
- Understand Currency Pairs. Major currency pairs are more liquid, meaning they can be quickly sold at close to market price, which makes them more popular with traders. Exotic currency pairs are less liquid and have a high spread, so you’ll need more capital to trade them.
- Consider Volatility. On Forex, volatility is the price fluctuation over a given period. High-risk traders may prefer higher volatility, as it boosts trading opportunities, while low-risk traders are better at trading when the market is less volatile. Big geopolitical events and economic news can upheave the market, changing its volatility.
These are only some of the factors you need to pay attention to. For more information about trading and trading tools that can enhance your performance, check forexstore.com.
Summary
Exchanging currency pairs is a great way to earn on market fluctuations. Understanding the fundamentals — like the difference between major, minor, and exotic pairs and which pair is better to trade — allows you to make better trading decisions and maximize your profit.
