In the foreign exchange (forex) market, currencies are traded in pairs, where one currency is exchanged for another. These currency pairs are the foundation of forex trading, and they are categorized into three main types: major pairs, minor pairs (also known as cross currency pairs), and exotic pairs.
- Major Currency Pairs: These pairs include the most widely traded currencies in the world and are associated with economies that are highly developed and stable. The major currency pairs are:
- 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
- NZD/USD: New Zealand Dollar/US Dollar
- Minor Currency Pairs (Cross Currency Pairs): These pairs do not include the US Dollar, but still consist of major global currencies. They are traded less frequently than the major pairs. Examples include:
- EUR/GBP: Euro/British Pound
- EUR/JPY: Euro/Japanese Yen
- GBP/JPY: British Pound/Japanese Yen
- AUD/JPY: Australian Dollar/Japanese Yen
- Exotic Currency Pairs: These pairs involve one major currency and one currency from an emerging or smaller economy. Exotic pairs are less liquid and can have wider spreads, making them riskier to trade. Examples include:
- USD/SGD: US Dollar/Singapore Dollar
- USD/HKD: US Dollar/Hong Kong Dollar
- EUR/TRY: Euro/Turkish Lira
Each currency pair is quoted with a bid and an ask price. The bid price is the price at which a trader can sell the base currency, while the ask price is the price at which a trader can buy the base currency. The difference between the bid and ask prices is known as the spread.
When trading forex, traders speculate on the relative value between the two currencies in a currency pair. If they believe the base currency will strengthen against the quote currency, they will go long (buy), and if they believe the base currency will weaken, they will go short (sell).
It’s important to note that forex trading involves significant risk and requires a good understanding of the market and trading strategies. Traders often use technical and fundamental analysis to make informed decisions about when to enter or exit trades.