What Are Forex Currency Pairs? A Comprehensive Guide

What Is Forex Currency Trading?

Currency trading, also called forex (foreign exchange) trading, involves buying and selling various currencies to profit from changes in their values on the global market. 

It is generally done through forex brokers, who act as the middleman between you, the trader, and the forex markets. Also, the forex market is the world's biggest and highly liquid financial market. It operates 24 hours daily except on weekends and holidays, so you need an expert intermediary.

But how would you make a profit from trading forex pairs? For each currency pair, there is an exchange rate. 

For example, the current exchange rate from US dollars to Euros is 0.92, commonly written as USD/EUR = 0.92, which means that each 1 US dollar (USD) is equivalent to 0.92 Euros (EUR). So, if you have 100 USD, you can get 92 Euros. 

This exchange rate fluctuates based on multiple factors, such as political instability, the country’s economic performance, and market liquidity, among other factors. So, you bet on the fluctuations of this exchange rate to profit. 

Understanding Forex Currency Pairs

As mentioned above, a currency pair is generally written as USD/EUR = 0.92. So, let’s break it down. 

A three-letter code represents each currency in a pair, with the first two letters indicating the country and the last letter representing the currency. For example, in USD, "US" stands for the United States, and "D" stands for Dollar.

This terminology is based on the International Organization for Standardization (ISO) currency code system, used globally to avoid confusion between different countries' currencies and facilitate international trade and finance.

What Are the Base and Quote Currencies?

Moreover, each currency pair has a name, “base currency” or “quote currency.” Generally, the forex currency pair is expressed as "Base Currency/Quote Currency." The first is the base currency, and the second is the quote currency.

For example, taking the USD/EUR pair. In this pair:

• The first currency (USD) is known as the base currency. 

• The second currency (EUR) is known as the quote currency. 

Therefore, the exchange rate represents how much you need of the quote currency to buy one unit of the base currency. 

Moreover, when you look at a currency pair quote, you will come across the bid price and the ask price. 

The bid price refers to the amount you can sell the base currency, while the ask price refers to the amount you can buy the base currency. 

The difference between these two is known as the 1.

3 Types of Forex Currency Pairs

There are different types of forex currency pairs: 

• Majors

• Minors

• Exotics

What Are Major Currency Pairs? 

A major forex currency pair is a currency pair that includes the US Dollar (USD) and one of the other major global currencies. They are called majors because they have high liquidity and trading volumes in the forex markets. 

Liquidity refers to how easily and quickly you can buy and sell a currency pair in the market without causing significant changes in its exchange rate. So, high liquidity means there are a large number of buyers and sellers.

Major forex currency pairs are considered the most traded and widely recognized pairs in the world of currency trading. 

Top 9 Major Currency Pairs

There are Nine major forex currency pairs which are:

• EUR/USD (Euro/US Dollar)

• USD/JPY (US Dollar/Japanese Yen)

• GBP/USD (British Pound/US Dollar)

• USD/CHF (US Dollar/Swiss Franc)

• NZD/USD (New Zealand Dollar/US Dollar)

• AUD/USD (Australian Dollar/US Dollar)

• USD/CAD (US Dollar/Canadian Dollar)

• USD/CNY (US Dollar/Chinese Yuan Renminbi)

• USD/HKD (US Dollar/Hong Kong dollar)

Major currency pairs benefits:

• Highly liquid, leading to tighter spreads

• Very attractive to traders and investors due to their liquidity and popularity 

• Great opportunities for market participation 

Additionally, major currency pairs are often considered less volatile than minor or exotic pairs, making them suitable for various trading strategies.

What Are Minor Currency Pairs? 

Minor or cross-currency pairs do not include the US Dollar (USD) but consist of other major currencies. 

While not as widely traded as major pairs, minor pairs still play a significant role in the forex market. 

Top 5 Minor Forex Currency Pairs

Below is a minor forex pairs list:

• EUR/GBP (Euro/British Pound)

• EUR/AUD (Euro/Australian Dollar)

• GBP/JPY (British Pound/Japanese Yen)

• EUR/CHF (Euro/Swiss Franc)

• EUR/CAD (Euro/Canadian Dollar)

Minor forex currency pairs benefits:

• Offer traders opportunities to diversify their portfolios and trade currencies from different economic regions

• Exhibit significant price movements and volatility, making them suitable for profitable trades

However, traders should be aware that liquidity in minor pairs can vary, and the bid-ask spreads may be wider than those of major pairs. It's essential to consider these factors when trading minor currency pairs.

What Are Exotic Currency Pairs?

Exotic forex currency pairs are currency pairs that include one major currency and one currency from a smaller or emerging market economy. These pairs are less liquid and more volatile than major and minor currency pairs. 

Exotic pairs are characterized by the inclusion of currencies from regions with developing economies or countries with less established financial markets.

Top 7 The Exotic Currency Pairs

Here are some examples of exotic currency pairs:

• USD/TRY (US Dollar/Turkish Lira)

• EUR/TRY (Euro/Turkish Lira)

• USD/SEK (US Dollar/Swedish Krona)

• USD/NOK (US Dollar/Norwegian Krone)

• USD/DKK (US Dollar/Danish Krone)

• USD/SGD (US Dollar/Singapore Dollar)

• USD/MXN (US Dollar/Mexican Peso)

Exotic currency pairs benefits:

• Are less actively traded than major and minor pairs

• Have wider bid-ask spreads, making them potentially more costly to trade

• Can be more susceptible to sharp price movements and market fluctuations

Traders interested in exotic pairs often do so for diversification or if they have specific insights into the economic conditions of the countries involved. However, exercising caution and thoroughly understanding the risks of trading exotic currency pairs is crucial.

What Are Commodity Currencies?

Commodity currencies are currencies of countries heavily reliant on the export of natural resources, particularly commodities like oil, metals, and agricultural products. 

These currencies often move in correlation with changes in commodity prices due to their economies' dependence on commodity exports.

The last three pairs in the seven major currency pairs are commodity currencies:

• NZD/USD (New Zealand Dollar/US Dollar)

• AUD/USD (Australian Dollar/US Dollar)

• USD/CAD (US Dollar/Canadian Dollar)

Conclusion

Forex trading is about exchanging currency pairs to profit from their changing values. You can make smarter trading decisions by understanding the basics, like how currency pairs are named and the difference between major, minor, and exotic pairs. 

Knowing these fundamentals is key, whether you're drawn to the high liquidity of major pairs or the unique opportunities in exotic pairs. With the proper knowledge and strategies, you can navigate the forex market more effectively and achieve your trading goals.