As we discussed forex trading last week, forex currency pairs were mentioned in the discussion. Today, we will discuss to you about currency pairs.
Foreign exchange market is the market that never closes. It has the biggest volume of the world’s business with traders around the world participating in the market every day.
The forex market has rose form the need for a system to aid the exchange of various currencies around the globe in order to trade. Forex market is considered as the financial market in the world, which reflects the financial dynamics of the field of trading more clearly.
In addition, all the trade in this market is a trade-off between the pairs of currencies from two different countries. These pairs are what we call currency pairs.
Forex Currency Pairs
A currency pair is the quotation and pricing structure of the currencies which are traded in the foreign exchange market. Meanwhile, the value of a currency is rated and is determined by its comparison to another currency.
In addition, the first listed currency of a currency pair is called the basic currency, while the second currency is called the quote currency.
The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency.
All the trades happening in forex involve the simultaneous purchase of one currency and sale of another. However, the currency pair can be seen as a single unit, an instrument that is bought or sold.
Basically, when you purchase a currency pair, you buy the base currency and implicitly sell the quoted currency. The bid actually shows you how much of the quote currency you need to get one unit of the base currency.
On the contrary, when you sell the currency pair, you will be selling the base currency and you will be receiving the quote currency.
The ask of the currency pair will show you how much you can get in the quote currency for selling one unit of base currency.
One good example for this is the most traded currency pair, which is the euro against the U.S. dollar. This is also known as EUR/USD. The quotation EUR/USD is equal to 1.2500, which means that one euro is exchanged for 1.2500 U.S. dollars.
In this example, EUR is our base currency and the USD is our quote currency. This means that you can exchange one euro for 1.25 U.S. dollars.
Types of Currency Pairs
Forex currency pairs have three different types; namely, major currency pairs, minor currency pairs, and exotic currency pairs.
Below we will show you what are these types of currency pairs.
Major Currency Pairs
Major currency pairs all have the U.S. dollar on one side, on either the base currency or the quote currency. This type of currency pair is well known since they are the most traded pairs in the foreign exchange market.
Furthermore, major currency pairs are mostly have the lowest spread and are the most liquid. Also, EUR/USD is the most traded pair in the foreign exchange market with a daily trade volume of almost 30 percent.
Listed below are the major currency pairs in the foreign exchange market:
- EUR/USD (Euro/U.S. Dollar)
- USD/JPY (U.S. Dollar/Japan Yen)
- GBP/USD (Great Britain Pound/U.S. Dollar)
- USD/CAD (U.S. Dollar/Canadian Dollar)
- USD/CHF (U.S. Dollar/Swiss Franc)
- AUD/USD (Australian Dollar/U.S. Dollar)
- NZD/USD (New Zealand Dollar/U.S. Dollar)
Minor Currency Pairs
Now we go to the minor currency pairs. This type of currency pair does not contain the USD or U.S. Dollar on either base currency or quote currency.
Minor currency pairs are also known as cross-currency pairs or crosses.
Traditionally, if you want to convert a currency, you need to convert the currency into U.S. dollar first before you can convert the currency you want. But with the help of minor currency pairs or currency crosses, you don’t have to go through with the long process since all brokers are now offering the direct exchange rates.
In addition, the most active crosses are derived from the three major non-U.S. dollar currencies, which are the Euro, Pound, and Yen. These currencies are also considered as minor currencies.
Below are the lists of minor currency pairs:
- EUR/GBP (Euro/Great Britain Pound)
- EUR/CHF (Euro/Swiss Franc)
- EUR/CAD (Euro/Canadian Dollar)
- EUR/AUD (Euro/Australian Dollar)
- EUR/NZD (Euro/New Zealand Dollar)
- EUR/JPY (Euro/Japan Yen)
- GBP/JPY (Great Britain/Japan Yen)
- GBP/CHF (Great Britain/Swiss Franc)
- GBP/CAD (Great Britain/Canadian Dollar)
- GBP/AUD (Great Britain/Australian Dollar)
- CHF/JPY (Swiss Franc/Japan Yen)
Exotic Currency Pairs
The last type of currency pair that we will talk about is the exotic currency pairs. This type of currency pair is made up of a major currency together with the currency of a strong but has a small economy from a global perspective, such as Hong Kong, Singapore, and European countries that are outside the Euro Zone.
Unlike the major currency pairs and minor currency pairs, exotic currency pairs are the least traded in the forex market.
Meanwhile, due to the lack of liquidity in these markets, the cost of trading with this type of currency pair can be higher than the first two types.
Here are the lists of the exotic currency pairs in the foreign exchange market:
- USD/SGD (U.S. Dollar/Singapore Dollar)
- USD/HKD (U.S. Dollar/Hong Kong Dollar)
- USD/ZAR (U.S. Dollar/South African Rand)
- USD/SEK (U.S. Dollar/Swedish Krona)
- USD/NOK (U.S. Dollar/Norwegian Krone)
- EUR/TRY (Euro/Turkish Lira)
- EUR/AED (Euro/UAE Dirham)
- EUR/QAR (Euro/Qatari Rial)
- EUR/BHD (Euro/Bahraini Dinar)
- EUR/SGD (Euro/Singapore Dollar)
Best Forex Currency Pairs to Trade
There are more than 200 countries around the world, which is enough to find various number of currency pairs to engage with trading. However, it’s important to know that not all currency pairs have the potential to deliver the best results to traders.
But before we tackle which are the best forex currency pairs to trade in the foreign exchange market, we will show you the popular currencies you can find in the field of forex trading. These currencies are: the Euro (EUR), U.S. Dollar (USD), Swiss Franc (CHF), Australian Dollar (AUD), Canadian Dollar (CAD), Japanese Yen (JPY), and British Pound (GBP).
With these popular currencies, you can find the best forex currency pairs that you can trade in the foreign exchange market.
Here are the considered as the best forex currency pairs to trade in the field of trading:
USD/EUR is the currency pair that is considered as the most popular in the market. This currency pair has the lowest spread among Forex brokers. USD/EUR is also associated with basic technical analysis.
One of the best things about USD/EUR is that it is not too volatile.
However, if you are not in a position to take any risk, you can think of USD/EUR as your best currency pair to trade, without causing you to overthink about it.
In addition, you can find a lot of information about this currency pair, which can help actually you avoid any mistakes while you are trading.
The profitable pips and possible large jumps of USD/GBP have contributed a lot towards the popularity of this currency pair. However, it is important for you to know that higher profits have much greater risk.
USD/GBP is a currency pair that can be grouped into the volatile category. But a lot of traders chooses this currency pair as their best currency pair to trade due to the plenty of market analysis information they can find.
USD/JPY is another popular currency pair that you can find in the foreign exchange market. This currency pair is associated with low spreads, and with USD/JPY you can follow a smooth trend as compared to other currency pairs.
Meanwhile, this currency pair has also the potential to deliver exciting profitable opportunities for traders.
Australian dollar has become the third most popular currency. AUD is extremely attractive for investors who are just starting or already pro in the trading market.
AUD/USD might be a little more challenging than the other currency pairs. However, due to its volatility, it gives the currency pair a unique benefit.
If you want to succeed in the foreign exchange market as a trader, you need to have a better and much deeper knowledge about currency pairs. Especially, because these are the currencies you will use in the world of foreign exchange trading.
It might take time to learn and familiarize yourself with all of the currency pairs in the market. However, it will actually help you to become a better trader if you have sufficient knowledge about forex currency pairs.
With the number of available currency pairs in the market, you might actually overwhelm yourself. You might be asking yourself what are the best forex currency pairs to trade. But, the truth is that it varies with each trader. This is why it is important for you to study and analyze the currency pairs as you enter or start trading in the foreign exchange market.
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