Understanding currency pairs: Majors, minors, and exotics

The foreign exchange market, which is commonly referred to in short-form parlance simply as "forex," trades in several currency pairs. Forex trade is recognized globally as the largest and most liquid market in finance, with trillions of dollars traded daily.

Traders can never go wrong if they grasp one basic concept of the forex market: currency pairs. No matter if you are a beginner learning the basics or a seasoned trader honing your skills, learning more about major, minor, and exotic pairs will never be a bad idea.

NOTE: Forex investments involve significant risk. Do not take the views mentioned here as financial advice. Please conduct thorough research before making any investment.

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What are currency pairs in forex?

Every time a trade is made in the foreign exchange market, currencies are purchased and sold in pairs. Such a pair is the relative value of one currency to another.

For instance, EUR/USD = 1.10. This denotes that value of USD is 1.10 compared to the EUR.

Every pair consists of two types of currency, named base and quote currencies.

• Base currency – the first currency (EUR)
• Quote currency – the second currency (USD)

The price shows how many units of the base currency can be purchased for one unit of the exchange rate.

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Why currency pairs are important in forex trading

Understanding these currency pairs helps traders in the following aspects:

• Study global economic relationships.
• Predict stock prices using macroeconomic information.
• Learn risk management in trading.
• Pick trading partners based on their style and risk tolerance.

The pairs can be widely classified into majors, minors, and exotics.

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Major currency pairs in forex trading

What are the major currency pairs?

These are the most frequently traded currency pairs in the Forex market. They are well-known for their fixed price actions and tight spreads, and they always include US dollars.

Examples of major pairs are the British pound and the US dollar (GBP/USD) or the euro and the US dollar (EUR/USD).

Features of major pairs:

• High trading volumes
• Reduced transaction costs
• Strong correlation with global economic data
• Best for beginners and day traders

Why trade major pairs?

The major pairs have a degree of predictability and efficiency that is ideal for a trader relying on technical analysis and news-driven trading.

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Minor currency pairs in forex trading

Minor currency pairs, otherwise known as cross currency pairs, do not involve the US dollar. They are composed of pairs of major currencies around the world.

Examples of minor pairs are the Euro and British pound (EUR/GBP) or the euro and Japanese yen (EUR/JPY) pairs.

Main features of minor pairs:

• Moderate liquidity
• Slightly higher spreads than major markets
• Depends on the regional economic conditions
• May be more volatile than major pairs

Why trade minor pairs?

Minor pairs have become a focus for those intending to diversify from markets influenced by the US dollar.

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Exotic currency pair

What are these pairs?

Exotic currency pairs consist of a major currency that pairs with another belonging to a developing or emerging economy. Exotic currency pairs have lower volume and higher risk.

Examples of exotic pairs are pairs of the US dollar and the Indian rupee (USD/INR) or the US dollar and the South African rand (USD/ZAR)

Main features of exotic pairs:

• Low liquidity.
• High spreads and transaction costs.
• More price volatility.
• Highly sensitive to political and economic instability in a country.

Why trade exotics pairs?

Exotic pairs can present lucrative trading opportunities, but they are more suitable for advanced traders with knowledge of geopolitical issues.

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How to make the right choice for a trading pair in forex trading

The choice of pair largely relies on:

• Trading experience - They tend to begin with major pairs.
• Risk tolerance - Exotic couples are riskier.
• Market knowledge - Awareness of economic indicators is important.
• Trading strategy - Scalping, swing trading, or long-term investment.

Instead of dealing with a bunch of different currency combinations, it can be better to specialize in a few.

Comprehending currency pairs, whether majors, minors, or exotics, is an important step in becoming a successful trader in forex. Majors, minors, and exotics have their own set of opportunities and challenges, right from being a major to being an exotic.

Positioning your trading goals with suitable pairs and being updated with global economic trends will make you go into this market with a positive approach.

Whatever the case may be, whether a beginner or someone polishing their strategy, learning about majors, minors and exotics can be important for making a foray into forex and having a good experience.

Edited by Abu Amjad Khan