Forex Currency Pairs when trading comes in 3 types – majors, minors and exotics. The major currency pairs are the most actively traded fx pairs as these have the most liquidity. Major forex pairs include EUR/USD, USD/JPY, GBP/USD and USD/CHF.
The forex market is the largest, most actively traded market in the world of finance. Open 24 hours a day 5 days a week, it is extremely volatile and provides a global opportunity to profit on movements in the price and value of certain forex pairs.
When trading in the foreign exchange market, you trade currency pairs. It is important to remember that you are trading one currency against another. A currency pair is a quotation of the value of two various currencies against each other. The first currency (the base currency) is quoted relative to the second currency (the quote currency). When you trade forex, you are essentially trading one currency for another, expecting to make a profit. When you buy the base currency, you are simultaneously selling the quote currency. When you sell the base currency, you are simultaneously buying the quote currency.
EUR/USD is the most commonly traded currency pair. In this quotation, EUR is the base currency and USD is the quote currency. If EUR/USD is equal to 1.20, then you require 1.20 USD to purchase 1.00 EUR.
There are four main types of forex currency pairs. These include majors, minors, crosses, and exotics.
Majors are considered the most popular currency pairs. Generally, a major currency pair includes USD and is usually more widely available to trade on the forex market, making them the most liquid. The major currency pairs are therefore the most crowded and most competitive areas in forex trading. As the most traded type of currency pairs, majors have the most extensive data and offer the most price accuracy.
Minors are slightly less common to trade than majors. Minor currency pairs do not generally include USD but they do include another major global currency, such as EUR/JPY or GBP/JPY. There is a slightly lower level of availability and liquidity with trading minor currency pairs in comparison to majors.
Crosses are similar to minors, only they do not necessarily carry a major currency pair. Cross-currency pairs do not include USD, nor any other major global currency. In essence, minors are a subcategory of crosses.
Exotic currencies are any global currencies that do not fall into the above categories. Exotic currency pairs typically include currencies from developing nations, small countries, or countries that are not regarded as financially powerful. Exotics can often be more volatile and usually less liquid, meaning they are often traded alongside majors.
When choosing a broker, you should consider the range of currency pairs they offer. Some broker only focuses on the major currency, with a selection of minor currency pairs. If the broker offers less than 50 currency pairs, it is likely there do not offer exotic pairs or cross pairs. Trading with non-major currency pairs do come with risk as they have lower liquidity, so can be harder to find a buyer or seller.
Pepperstone and IC Market offer between 60 and 65 currencies pairs, so offer a mix of all currency types. CMC Markets offer 330 currency pairs as they count the same pair twice by inverting the combination (i.e. AUD/USD and USD/AUD).
There are several considerations to make before choosing a currency pair to trade. Although you will likely not stick to one pair, it is still worth noting some features of currency pairs.
Predictability revolves around how much data and information is available on particular currencies. As mentioned above, major currency pairs have a greater amount of information available, including news alerts, trading patterns, and historical data. The more information available, the easier it is to predict movements and performance of the currency value.
Price stability typically depends on the economic health of the country whose currency you are trading. It is important to be aware of the economic health of the particular nations and monitor the effects on price movements when trading their currency. Large, financially powerful countries will usually have more price stability than smaller, developing countries due to the economic strength and political power.
Liquidity is an extremely important factor to consider when trading forex. Liquidity essentially ensures the currency is easy to buy and sell. Currency pairs that are more widely available to trade (major currency pairs) are more liquid than other types.
Timing of your trading is also extremely important to consider. As mentioned above, the forex market is open 24/5. Depending where you are trading from and which currency pair you are trading, it is important to consider the relative time of day/night.
You can trade a wide range of currency pairs in the forex market. The following list summarizes the most popular combinations to trade.
The Euro / US Dollar is the most widely traded currency pair as it represents the two strongest major global economies. The EUR/USD is an extremely liquid currency pair and easily tradeable. Information on these two currencies is widely available and transparent. Major economic events such as the non-farm payroll, US Federal Reserve interest rates, and the European Central Bank announcements are some of the most influential events to the forex market.
Another popular currency pair is the Great British Pound / US Dollar combination. This currency pair relies heavily on how well the respective economies are performing, as well as the interest rates set by the corresponding national banks. The GBP is sometimes labelled as the “Pound Sterling’.
The US Dollar / Japanese Yen currency pair is extremely liquid and commonly traded as it combines the biggest global currency with the most traded currency in the Asian market. A major contributing factor to the performance and value of this currency pair is the relationship between the two nations.
The Australian Dollar / US Dollar currency pair is a popular currency pair for forex traders looking to profit from movements in the price resulting from changes in commodity prices. Commodities such as Iron Ore, Gold, and Coal are major influences on the performance of the Australian Dollar against the US Dollar and other major global currencies. The AUD is sometimes referred to as the ‘Aussie’, and can be considered a commodity currency due to the heavy reliance on commodities.
The Euro / Great British Pound is the most commonly traded minor currency pair (as it does not include the US Dollar). The Euro and Great British Pound represent two major global economies and due to their close proximity and similarities in trade arrangements, it can be a difficult currency pair to trade. If you recall, Brexit (Britain’s exit from the European Union) caused a major spike in volatility of the EUR/GBP currency pair.
The price of oil is a major influence on the US Dollar / Canadian Dollar currency pair. The reason being is that Canada rely heavily on oil as their major export and thus, their economy is impacted by the price. The US and Canada also have a close relationship, meaning trade arrangements are common. If you ever hear the term ‘Loonie’, it is referring to the CAD.
The US Dollar / Swiss Franc currency pair is considered a safe haven investment due to the economic strength and reliability of the two currencies. The Swiss Franc in particular is a safe haven asset, as the currency is typically stable during times of economic and political turmoil. For this reason, the USD/CHF currency pair is a frequently traded combination. There is also a vast amount of data and therefore a high level of predictability on this currency pair.
Another commonly traded minor currency pair, the New Zealand Dollar / Swiss Franc is heavily reliant on the agricultural influence of New Zealand. Therefore, if you are trading the NZD/CHF currency pair, it is recommended to closely monitor the prices of global agricultural products. Trading the NZD/CHF currency pair is slightly more safe than the NZD/USD combination due to the stability of the CHF.
The US Dollar / Chinese Renminbi or Yuan is a major currency pair that is heavily influenced by the US-China trade war and ongoing economic and political tension. The corresponding governments often attempt to drive prices of imports and exports higher or lower, and this has a major effect on the value of the USD/CNY. CNY can often be referred to as CNH, depending on whether it is being traded onshore or offshore.
The final major currency pair of this list is the US Dollar / Hong Kong Dollar. This combination features a linked exchange rate that allows the HKD to fluctuate between HK$7.75/HK$7.85 to US$1.00. Once again, the relationship between the two economies is a major contributing factor to the movements in value.
When trading forex, it is important to remember a few key points before jumping in with any currency pair. To optimize your trading, it is best to consider the time of day you are trading, long-term investing in assets or short-term scalping on CFDs, and knowledge of the currencies and corresponding financial market you are interested in. Consider all the factors discussed in this article in developing your trading strategy, as they all contribute to the performance of currencies against each other. As always, it is suggested to test your skills with a demo account before you start trading with a live account on your chosen trading platform.
Majors are considered the most popular currency pairs. Generally, a major currency pair includes USD and is usually more widely available to trade on the forex market, making them the most liquid. The major currency pairs are therefore the most crowded and most competitive areas in forex trading. Extensive data and price accuracy is available for majors.
Crosses are similar to minors, only they do not necessarily carry a major currency pair. Cross currency pairs do not include USD, nor any other major global currency. In essence, minors are a subcategory of crosses.
Justin Grossbard has been investing for the past 20 years and writing for the past 10. He co-founded Compare Forex Brokers in 2014 after working with the foreign exchange trading industry for several years. He also founded a number of FinTech and digital startups including Innovate Online and SMS Comparison. Justin holds a Masters Degree and an Honours in Commerce from Monash University. He and his wife Paula live in Melbourne, Australia with his son and Siberian cat. In his spare time, he watches Australian Rules Football and invests on global markets.