As a currency pair is one of the most important concepts in Forex trading, we are sure you are finding out whether you are a beginner or an old-timer; the type of currency pairs, categorized as major, minor, and exotic, significantly differ from each other and will influence your decision-making regarding trading strategy.
What Are Currency Pairs?
The currencies are traded in pairs when trading in the forex. Each pair is an expression of the exchange rate of two currencies. Considering the following pair: EUR/USD, the first currency, EUR is the base currency while the second one is the quote currency, USD. The quoted rate will then determine how much of the quote currency you would need to purchase one unit of the base currency.
1. Major Currency Pairs
Major currency pairs are the most liquid pairs, involving the largest economies, and have high liquidity, narrower spreads, and are less volatile in general.
Key Characteristics:
- High Liquidity: They are easy to trade because of their popularity
- Low Transaction Costs: Narrow spreads make them cheap to trade for
- Global Events: Economic data releases, central bank policies, and other geo-political events impact the prices heavily
Examples: major pairs
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CHF (US Dollar/Swiss Franc)
- AUD/USD (Australian Dollar/US Dollar)
- USD/CAD (US Dollar/Canadian Dollar)
2. Minor Currency Pairs
Minor pairs, commonly known as cross-currency pairs, do not include the US dollar but other major currencies. Since minor pairs hold relatively low liquidity compared to the major pairs, less liquid, and higher spreads are recorded in the markets of minor pairs.
Key Characteristics:
- Less Volatile: Liquidity is traded relatively less than major currency pairs
- Higher Spreads: Prices fluctuate much more.
- Useful for Diversification: Provide opportunities outside of USD-based trades.
Examples of Minor Pairs:
- EUR/GBP (Euro/British Pound)
- EUR/AUD (Euro/Australian Dollar)
- GBP/JPY (British Pound/Japanese Yen)
- AUD/NZD (Australian Dollar/New Zealand Dollar)
3. Exotic Currency Pairs
Exotic pairs refer to a major currency combined with another currency from a developing or small economy. The offers are not as liquid and are more volatile, which means they have wider spreads.
Characteristics:
- Low Liquidity: There are fewer traders, meaning there are larger price gaps.
- High Volatility: The prices change significantly over a little time.
- Higher Costs: The wider spreads mean that trading is going to cost you more.
Examples of Exotic Pairs:
- USD/TRY (US Dollar/Turkish Lira)
- EUR/SEK (Euro/Swedish Krona)
- USD/ZAR (US Dollar/South African Rand)
- GBP/SGD (British Pound/Singapore Dollar)
How to Choose the Right Currency Pair?
Actually, the selection of the best currency pair depends upon the trading style, risk tolerance, and knowledge of the market.
- For Beginners: Major pairs are less volatile and hence relatively predictable so go for it.
- For Experienced Traders: There is always scope for diversification into minor and exotic pairs, opening up scopes and potential returns more overnight.
- Analyze Liquidity : If you are into day trading then high-liquidity pairs should be at the prime whereas, as far as your strategy is concerned with long-term goals in mind, less liquid pairs must okay.
Conclusion
This is why, out of necessity, every forex trader should be aware of the distinction between the three categories of currency pairs: majors for stability and low costs, minors for diversification, and exotics for higher risk-reward ratios. You could either be a beginner or fine-tune your trading strategy if you know how these pairs work.
Ready to Start Trading?
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