The Forex currency pair is one of the main concepts that every trader initiated in Forex trading should learn. It’s normal that people at first have trouble understanding this concept, but it’s actually easier than you think.
Currency pairs, that’s what assets traded in the Forex market are called, are really currency pairs or currencies from all over the world. As the title says it is a pair where the first currency is called the base currency and the second currency is called the quote currency.
For example, the currency of the region or zone of Europe called the Euro and the currency of the United States called the Dollar, these two currencies make up the EUR/USD currency pair. The Euro would be the base currency and the US dollar would be the quote currency.
If you buy the EUR/USD pair, you are buying Euros and selling Dollars. If you sell the EUR/USD, you are selling Euros and buying dollars.
The price of the base currency is always calculated in units of the quoted currency.
For example, the exchange rate for the EUR/USD is 1.3000. This means that one Euro costs 1,3000 dollars (one dollar and 30 cents).
To quote a currency pair, the ISO 4217 code of each currency is used concatenatedly and separated by a slash, for example EUR/USD will be the pair formed by the Euro (EUR) as the base currency and the US dollar (USD) as the quote currency. In many cases the slash to separate the two currencies is ignored and the codes of both currencies are written without separation, for example EURUSD.
Major Forex currencies
In the Forex market transactions are based on the currencies of the countries with the greatest economic importance (major currencies).
By making combinations of these 8 most traded currencies with others, we get the main or major currency pairs and the cross currency pairs or crosses.
The Forex market is composed of a large number of currencies belonging to various countries of the world. However, few pairs can really be called major currency pairs.
Major currency pairs are all currency pairs that contain the US dollar (USD) as either the base or quote currency. Therefore, they are the most traded pairs in the Forex market. On the other hand, major pairs operate on Forex with a low spread (the difference between the bid and offer price) and are the most liquid. However, the EUR/USD is the most traded pair, with a daily volume of around 30% of the entire Forex market.
Currency pairs that do not contain the US dollar are what are known as minor currency pairs or simply “crosses”.
The most commonly traded minor currency pairs or “crosses” in the Forex market are: EUR/CHF, EUR/GBP and EUR/AUD. These pairs are characterized by a high level of liquidity, although not as much as the major pairs. On occasion, the EUR/CHF may be more liquid than the USD/CHF, as participants or institutional traders are looking to trade the Swiss Franc and the Euro.
Another important group of currency crosses are those formed by pairs that include the Japanese yen (JPY) such as, GBP/JPY, EUR/JPY, CAD/JPY and NZD/JPY.
Usually these currency pairs are less liquid than the major pairs, tend to move more erratically, and have a higher spread, although they tend to be excellent opportunities for experienced traders, who know the characteristics of these pairs.
Crossed pairs are influenced by the US dollar and this should not be forgotten when trading in the FOREX market. Similarly, the correlations and relative strength of the currency pairs, this is fundamental and we will see it during the course of the course.
Exotic currency pairs
Another group of known currency pairs are what are known as exotic currency pairs.
We classify this group of currency pairs with certain characteristics in terms of liquidity, trading and spread. These currency pairs have a high spread and low trading volume and are actually under-traded most of the time.
Exotic currencies generally originate from developing countries, such as some sectors in Asia, the Middle East and Africa.
Therefore, Forex traders should be very careful when trading these exotic currency pairs. Indeed, these pairs experience uncontrolled price swings and very high spreads, even reaching a spread of 56 pips.
That is, compared to major currency pairs and minor currency pairs whose spread ranges from 1 pips to 7 pips. Therefore, this means that when entering a trade in the Forex market, the broker will charge us more money in commission with exotic currency pairs than with major or minor currency pairs. This is because exotic currency pairs have a very high spread for trading.