Forex trading involves buying and selling currencies. A trader buys a currency and sells that later to get the profit from the price difference. Typically, currencies are traded in pairs, in which one currency is quoted against others. In currency pairs, you will get to see two currencies.
The first currency is known as the base currency, and the other one is known as the quote currency. However, the ultimate goal of a currency pair is to compare the values of two currencies. As a result, you know when to sell the currency and buy them off.
Categories in Currency Pairs
Not all the currencies have the demand, and some of the pairs are traded most while some may be least traded. And based on that, currency pairs are categorized into three types Major, Minor, and Exotic currency pairs. Let’s understand these pairs.
Major pairs are traded most globally and are considered the most attractive and liquid to the traders. However, the number of major pairs differs as some trader considers the four most popular pairs for trading, including EUR/USD, GBP/USD, USD/JPY, and USD/CHF. On the other hand, some trader also includes cross pairs and commodity currencies such as AUD/USD and USD/CAD.
However, in a broader sense, all of these six currencies are major. Major pairs cover the world’s biggest economies, which usually are traded in large volumes. Besides, trading in large volume means a smaller spread. The following are the details of the Major currencies.
Euro/US Dollar is also called ‘Fiver.’ 23% of the world forex transaction is traded in EUR/USD currency pairs. Besides, these two currencies are the biggest economies in the world. It is one of the top live forex signals for the newbies as well as the experts. Furthermore, it ensures a tight spread trading. However, the high volume of Euro/US Dollar tends to decrease the price difference.
After EUR/USD, US Dollar/Japanese Yen is the second most popular pair. Usually, the carry traders use the Yen to borrow it and then invest higher returned currencies. The benefit of the Yen is that it has low inflation, and the interest rate is also lower.
Moreover, the trading amount of USD/JPY is extremely high, which indicated the higher liquidity as well as the low bid-ask spread.
As the EUR/USD, Pound Sterling/US Dollar is another major forex pair as the United Kingdom’s economy is correlated to the European Union. Besides, it is also highly liquid, and that the reason behind its high trading volume.
Swiss economy tends to have lower risk and trading USD/CHF pairs reduce the associated risk during forex trading. US Dollar/Swiss Franc is nicknamed as ‘Swissy’ that glorifies the Swiss Franc’s safe-haven condition.
The Australian economy is highly dependent on farming beef, mining, wool, and wheat. And China is the biggest trading partner for Australia. As a result, they have a correlation. So, the fluctuation of the Australian Dollar greatly depends on China, which influences the Reserve Bank of Australia. As a result, AUD/USD is affected by these. That is why AUD/USD is commodities based pairs.
US Dollar/ Canadian Dollar greatly depends on natural gas, oil, and timber. Besides, the Canadian Dollar is closely related to the US dollar. So, when you trade, you have to look at the forex forecast based on these commodities.
Although trading major currencies are a safe bet, but you still will need live forex signals to know the most yielding pairs. Besides, you should also measure the forex forecast to know a currency’s future.
There are some other currencies that are considered impotent after USD are called minor currency pairs. Examples of minor pairs are EUR/GBP, EUR/AUD, EUR/CAD, etc. However, it is not necessary that all the pairs should include USD. The pairs that don’t contain USD are called crosses. Most of the crosses are derived from the Great British Pound, Euro, and Japanese.
Exotic pairs are not widely traded, like the major and minors. Exotic pairs are usually including currencies from developing and emerging economies such as from Asia, Africa, or the Middle East. As they are not traded frequently, exotic pairs are not that much liquid. Examples of some exotic pairs are USD/SEK, USD/NOK, USD/MXN, and many more.
Elements that Affect the Currency Pairs
The spread and profit probability of a pair changes depend on three things, which are the central bank’s overnight interest rates, politics, and economic data. Let’s find out how they affect.
Interest Rates: Central banks are responsible for maintaining a country’s financial and monetary stability. And they do this by changing the interest rates frequently, which eventually affects the currency. However, an increase in overnight interest rates increases the demand for the currency.
Politics: Political situation highly affects the currency. In fact, sometimes it has a long term effect. Furthermore, Elections, trade wars, corruptions have a negative impact on the economy as well as the currency, which can depreciate the value.
Economic Data: Any economic publications and updated data can impact positively and negatively. However, some of the economic data that can affect a major currency are employment data, GDP, inflation, etc.
Understanding currency pairs are really important for successful forex trading. You have to know your pairs before trading. However, the first step of understanding currency pairs starts with knowing the major pairs. It is also advisable to check out the forex forecast so that you will know what you can earn from speculation.