Currency Pairs Explained: Majors, Minors, and Exotics

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A currency pair is a comparison of two currencies, with the base currency being the first stated currency and the quote currency being the second. The value of the base currency is compared, and the amount of the quotation currency required to buy one base currency unit is shown. The ISO currency code, a three-letter alphabetic identifier on the global market, is used to identify currencies, such as the US dollar.

The first mentioned currency, also known as the base currency, is purchased when an order is made for a currency pair, while the second listed currency, also known as the quote currency, is sold.
An exchange rate price quote for two distinct currencies traded on foreign exchange markets is known as a currency pair.
The most liquid currency pair in the world is said to be the EUR/USD pair. The second most traded currency pair worldwide is USD/JPY.

Having an Understanding of Currency Pairs

The foreign exchange market, or forex market, is where currency pairings are traded. In the financial industry, it is the biggest and most liquid market. The buying, selling, trading, and speculating of currencies are all permitted on this market.

Additionally, it makes currency conversion possible for commerce and investment internationally. The currency market sees a tremendous volume of activity and is open twenty-four hours a day, five days a week (including most holidays).

Forex operations involve buying and selling one currency simultaneously, but the currency pair itself can be seen as a single item. A forex broker purchases the base currency and sells the quotation currency when purchasing a currency pair.

On the other hand, you sell the base currency and get the quote currency when you sell the currency pair. Currency pairs are quoted using forex brokers’ ask and bid prices. The bid price is the price at which the broker will purchase the base currency in exchange for the quote or counter currency, whereas the asking price is the cost at which the broker will sell the base currency.

You sell one currency to purchase another when you trade currencies.

On the other hand, when trading stocks or commodities, you use cash to purchase a certain number of shares of a company or a unit of that commodity. The values of a trading pair are influenced by economic variables related to currency pairings, such as interest rates, GDP, and economic growth.

Major Currency Pairs

EUR/USD, which compares the euro to the US dollar, is a popular currency pair. It is the most liquid currency pair since it is the most traded pair internationally.

The notation EUR/USD = 1.2500 indicates a conversion rate of one euro to 1.2500 US dollars. Here, the quote currency (counter currency) is USD, while the base currency is EUR.

In other words, one euro is worth 1.25 US dollars. You might also look at it this way: $125 will get you 100 euros. The number of currency pairings equals the total number of currencies in existence. As currencies arrive and leave, the overall number of currency pairings that exist fluctuates. Each pair of currencies is grouped based on the daily volume of trading for that pair.

The main currencies are those that trade with the highest volume versus the US dollar. These currencies include:

The dollar vs the Japanese yen or USD/JPY
The US dollar vs the Euro, or USD/EUR
The US dollar against the Swiss franc or USD/CHF
The US dollar vs the British pound or GBP/USD
The US dollar vs the Canadian currency, or CAD/USD
The US dollar relative to the Australian dollar, or AUD/USD

Because both Canada and Australia are wealthy in commodities and their prices have an impact on both nations, the last two currency pairings are referred to as commodity currencies.

The markets for the main currency pairings are often the most liquid, with trading taking place every day from Monday through Thursday. The currency markets are open from Sunday night till Friday at 5:00 p.m. Eastern time in the United States.

Pairs of Minors and Exotics

We refer to currency pairs or minor currencies or crosses that are not linked to the US dollar. Though not as liquid as the majors, these pairings nonetheless have somewhat broader spreads and are respectably liquid markets.

The currency pairs in which each currency is also major are among the crosses that trade with the highest volume. The EUR/GBP, GBP/JPY, and EUR/CHF are a few instances of crosses.

Emerging market currencies are examples of exotic currency pairings. These pairings have substantially bigger spreads and are less liquid. The US dollar and Singapore dollar, or USD/SGD, are an illustration of an exotic currency pair.

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The ideal forex pair for beginners to trade

The AUD/USD pair is a great option for beginners since it is less likely to spike or drop unexpectedly and is more predictable. This pair has also been mentioned as one of the least volatile in several studies.

In conclusion, EUR/USD, GBP/USD, and USD/JPY are the best currency pairings for novices to trade.

Conclusion

In conclusion, if you are relatively new to the forex market, it is not a smart idea to start trading exotic currency pairings. They are more erratic, less liquid, and have greater spreads than majors and minors. Because there is greater trade volume and reduced spreads, trading currency pairings from majors or minors may be more advantageous. You can experiment with trading exotic pairs on a demo account as you acquire expertise, since the potential rewards may outweigh the dangers.