Even if you are a total beginner in trading, you probably already know that while trading Forex, you will be dealing with currency pairs. But what exactly are the currency pairs? To put it simply: a currency pair consists of two different currencies, and its price represents the exchange rate of the first currency over the second one. When you are opening a position for an X/Y pair, the X currency is called the base currency, while the Y currency is called a quote currency.
So, if you’re buying a currency pair, you are buying the base currency by selling the quote currency. And if you’re selling that currency pair, you’re buying the quote currency by selling the base currency.
Understanding currency pairs in Forex trading is one of the fundamental aspects of achieving success. This should not be a surprise, because you will be dealing with them your entire time in the market. However, it’s not something to worry about: understanding the main idea behind currency pairs is not difficult at all.
Today, we will talk about currency pairs basics. So, if you are just getting started in the market and are willing to learn more about trading, follow us as we discover the most important aspects of trading currency pairs.
Types of Currency Pairs in Forex
Before we go any further, we should first learn about different types of currency pairs. Many traders are having a hard time deciding which currency pair to trade. This is something that even well-experienced traders are having a hard time doing. According to successful traders, you should trade the currency pairs that you’re familiar with. The more you know, the easier it will be for you to make more accurate predictions. Here are three major types of currency pairs available in the Forex trading market:
- Major Currency Pairs
- Minor Currency Pairs
- Exotic Currency Pairs
Below, we will discuss these currency pairs one-by-one.
Trading With Majors
Major Currency pairs are the ones that are made up of USD + one of the major currencies in the market. One of the most traded major currency pairs is EUR/USD. It also stands to be the most liquid currency pair globally. If you are trading EUR/USD, it means that you are buying Euro while selling the US dollar. In this pair, the Euro is the base currency, and the USD is the quote currency. The quote currency is also sometimes called counter currency.
The major currencies are the ones that are traded in the most volume in pairs with USD. There are several major currency pairs, including EUR/USD, USD/CHF. AUD/USD, USD/CAD, USD/JPY, and GBP/USD.
AUD/USD and USD/CAD are also called commodities currencies because Australia and Canada are very rich when it comes to commodities and the prices of their national currencies are very heavily influenced by the prices of commodities.
Major currency pairs are known to have very narrow spreads, and they can also be traded every working day, 24 hours a day.
Also, it is much easier to get accurate information about these currency pairs online, which is one of the main reasons why so many newcomers are using them. Although the major currency pairs list is short, they play a huge role in the world of Forex.
Trading With Minors
Minor currency pairs are the ones that are made up of major currencies but don’t include USD. They are also many times called cross currency pairs. They are not as liquid as the major currency and the spreads are also wider. Although not as liquid as major currency pairs, the liquidity is still sufficient. Some of the top traded cross currency pairs are EUR/CHF, EUR/GBP, and many others.
Trading With Exotics
Exotic currency pairs are the ones that are made up of emerging market currencies. The spreads for trading these currencies are much wider, and their liquidity is significantly lower than Majors or Minors. These types of currency pairs are made up of one major currency, which is traded in pairs with the currency of the developing market.
For example, if you pair the Turkish Lira to USD, you will have an exotic currency pair. Some of the most popular exotic currency pairs include EUR/TRY, GBP/ZAR, AUD/MXN, and many others. Exotic currency pairs definition is pretty straightforward, you just need to take one major and one developing region’s currency, and there you have an exotic currency pair.
Basics of Forex Trading Pairs
There are as many currency pairs available on the market as currencies themselves. The number of them is changing very frequently, as new currencies are adopted or the older ones are changed, new currency pairs are born as well. Because of this, traders always have a huge list of currency pairs that they can choose from, which is a great thing. However, before you start trading FX, you will need to learn some basics.
As we have already said, the Forex trading market stays open for 24 hours a day, 5 days a week, and the trading volume that the market sees is huge. As we have already said, when you are trading Forex, the currency that you are buying is called the base currency, and the one you are selling is called quoted currency. In general, understanding currency pairs and the concepts that we are talking about is not that hard, but there really is a lot that goes into it.
There also are bid and ask, what are those? The bid in the Forex trading market represents the buying price. It is the amount of quote you will need to get one unit of the base currency. On the other hand, the ask is the selling price. This is the amount of quote you will get when you sell one unit of the base currency.
Unlike other trading markets, like, stocks, for example, while trading Forex, you will be buying one currency pair while selling another. In the stock trading market, on the other hand, you would have to use cash to buy a part of the shares.
Most Popular Pairs on the Market
It should not come as a surprise that the most popular currency pairs on the market are the majors. They are known to be the most dominant and strongest currencies on the market, and because of the fact that they are traded so widely, they also offer a great deal of liquidity to traders. The most traded currency around the world is the United States dollar, which is not a surprise at all. After all, the USA is the largest economy in the world.
There are many currency pairs in Forex, but none of them are as popular as major currency pairs, and this happens for a reason. There are many things that affect the major currency pairs, but the main fundamentals that have an influence on the currency pairs are the changes in overnight interest rates by the central banks, economic data, and political events around the world. Central banks are a very important part of the changing prices of the currency pairs, one of their main job is to maintain monetary and financial stability in their countries.
They do so by influencing changes in the interest rates. When the interest rate is increased by a central bank overnight, the demand for the currency is also increased. Also, the economic data that are reported around the world influences the prices of the currencies as well. These special releases give inverts the idea about the performance of the economy of certain countries, which, in turn, has an influence on the price of the national currency of the country.
The majority of the currency pairs are very much affected by the ongoing events in politics around the world, such as elections, for example. Recently, it was shown by the US’s Presidential Debate of 2020 that politics have a huge impact on the price of the currency of the country.
Also, during a crisis, traders are more likely to invest in so-called safe-haven currencies, such as USD, for example. Because of this, during the times of crisis, when the prices of currency pairs around the world are going down, the prices of safe-haven currencies are more likely to go up.
Top Currency Pairs to Trade
The fact of the matter is that when you are looking for currency pairs to trade, the thing that really can make a difference is your interests. If you are one of the countries with developing economies and you believe that trading the national currency is a better option for you, then you are most probably right.
However, if you are having a very hard time deciding which currency pairs to use and you are a beginner on the market, it would be a much better choice to use major currency pairs. In general, it is much easier to trade major currency pairs because getting information about them is much easier.
There are a lot of analytical tools that you will have to use while trading Forex, in the case of major currency pairs, there are a lot of choices that you have. As we have already said, the currency prices are very much influenced by the ongoing events around the world, and while investing in one of the major currency pairs, you will have a much easier time finding information about them online.
There are more than 200 countries around the world, and the number of currencies that are available on the market are a lot. If you want to be successful in this market, it is of utmost importance that you trade the currency pair that you are the most knowledgeable about. A great pair is the one that you would not have a hard time researching, so, always use the currency pairs that you can understand better.
Analyzing Market While Trading Forex
While trading Forex, people are using different types of technical and fundamental analysis. No matter which Forex pairs categories you are using for trading, you will have to use analytical tools to make sure that you are doing the right thing. Trading is a skill that takes some time to master, for it to be successful, you will have o work on your patience, discipline, and you should also have an interest in this market. For the best outcome, traders use technical or fundamental analysis.
With the help of technical analysis, traders try to predict future price movements based on a number of indicators. On the other hand, with fundamental analysis, traders make decisions based on economic data and news releases. If you want to be successful while using currency pairs analysis, you need to know how to use them. It actually is not that hard and can be mastered very easily.
Final thoughts on currency pairs for beginners
Currencies are what you use to trade Forex. There are three major types of currency pairs available in the market: Major, Minor, and Cross currency pairs. To understand which one you should trade, you will have to understand what your needs in Forex are.
In the currency pair, the first one is called the base currency, and the second one is the quote currency. When you’re buying a pair, you’re actually selling the quote currency to buy the base currency; whereas you sell the base currency to buy the quote currency, if you’re selling that pair. Understanding currency pairs in Forex trading is one of the most essential underlying aspects of your success. If you learn what influences price changes of currency pairs, you will already be one step ahead of other traders.