Trading in the Forex market will always involve the buying and selling of two currencies at a time. These two currencies are referred to as ‘currency pairs’ and they’re made up of the base currency and the quote currency. When trading currencies, the difference in the price of a currency pair is where you’ll make your profit or loss.
The one currency that is listed first is called the base currency, and the currency listed second is called the quote (or counter) currency.
For example, for the currency GBP/USD, the British Pound (GBP) is the base currency and the US dollar (USD) is the quoted currency.
This is the first currency set that appears in the Forex currency pair exchange rate. It’s the one that’s bought or sold for the quote currency. In the example above, the GBP is the base currency.
This is the second currency that appears in a currency pair exchange rate, and is also known as the ‘counter currency’. In the example above, the USD is the quote currency.
This is the second currency that appears in the pair, and is also known as the ‘counter currency’. In the example above, the USD is the quote currency.
There are three categories of currency pairs:
As we mentioned, there are three categories of currency pairs to trade in the Foreign Exchange market – those are major currency pairs, minor currency pairs, and exotic pairs. Let’s see what each category means for forex traders.
While you can trade almost any currency pair in theory, there are certain pairs that are consistently the most traded currency pairs in the forex market. These are referred to as ‘major currency pairs’ or ‘majors’. These major pairs make up 80% of the entire trading volume in the Forex market. Basically, there are 8 major currencies that include the US dollar, the British Pound, the Euro, the Japanese Yen, the Canadian Dollar, the Swiss franc, the Australian Dollar, and the New Zealand Dollar.
Some examples of major pairs include the EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD. Obviously, the most traded currency pair in the world is the Euro Dollar (EUR/USD).
In Forex trading, the various combinations of major forex pairs have developed their own nicknames. Check them out below!
Currency pairs that do NOT include the U.S. dollar (USD) in their pairing are known as cross-currency pairs or simply as crosses.
Generally, the most heavily traded cross pairs are derived from the three major non-USD currencies: EUR, JPY, and GBP. For example, some of the most traded currencies include the GBP/JPY, EUR/JPY, AUD/CAD, NZD/JPY, etc.
Fun fact: Back in the old days, if someone wanted to change currencies, they would first have to convert their currencies into U.S. dollars, and only then could they convert their dollars into the currency they desired.
Exotic… you’re probably thinking exotic countries and exotic belly dancers, but let me stop your imagination there. The label has nothing to do with the location or size of the country (or the number of belly dancers) where the currency is used.
Exotic forex currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, Chile, Turkey, or Hungary. Other currency pairs include EUR/TRY, AUD/NOK, GBP/SEK, and many more.
A benefit to trading exotic pairs is that they may offer higher potential returns due to wide price fluctuations. However, this means that trading an exotic currency pair is usually riskier as it has high market volatility and in some cases, heavy involvement from central banks. Therefore, in most cases, day traders seek to trade an exotic forex pair with relatively narrow spread and low to medium market volatility to reduce the risks involved in trading such exotic pairs.
Beyond that, many traders are looking to exploit the interest rates differentials in forex trading. This type of currency trading known as the carry trade forex trading strategy is usually more common when trading exotic pairs than trading major currencies or currency crosses.
The chart below contains a few examples of Exotic forex pairs.
Wanna take a guess what those other currency symbols stand for? Good luck!
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