How the 3 Types of Currency Pairs Are Used

How the 3 Types of Currency Pairs Are Used

Currency pairs represent the exchange rate between two currencies, and understanding them is one of the fundamental aspects of Forex trading success. There are three main types of currency pairs – let’s have a look at what they are and how they’re commonly used out in the wild.

1. Major Currency Pairs

Major currency pairs are the most commonly traded pairs in the Forex market. They’re currency pairs made up of some of the globe’s biggest and most stable economies. These pairs have high liquidity (loads of orders to buy and sell) and offer tight spreads (small difference in the ask and bid price), making them attractive to traders of all levels.

Meet the major currency pairs

• EUR/USD (Euro/US Dollar) – The most traded currency pair of all. It often serves as a benchmark for the entire Forex market.
• USD/JPY (US Dollar/Japanese Yen) - Highly influenced by economic developments in both the United States and Japan and considered one of the most liquid pairs.
• GBP/USD (British Pound/US Dollar) - Known for its volatility and often influenced by factors like Brexit negotiations and UK economic data.
• USD/CHF (US Dollar/Swiss Franc) - The Swiss franc is considered a safe-haven currency. USD/CHF is often impacted by global economic uncertainty.
• AUD/USD (Australian Dollar/US Dollar) and NZD/USD (New Zealand Dollar/US Dollar)
- These pairs are influenced by commodity prices and the economic performance of their respective countries.
• USD/CAD (US Dollar/Canadian Dollar) - This pair is closely tied to oil prices and economic conditions in America and Canada.

2. Minor Currency Pairs
Minor currency pairs, sometimes called cross-currency pairs or crosses, are a bit different in the Forex world. Unlike major pairs, they don't include the US dollar in the mix. Instead, they're made up of either two major currencies or a major currency and one from a smaller or emerging economy.

Minor currency pairs are used in the market to provide traders with alternatives that don't include the US dollar, allowing them to diversify their trading strategies and take advantage of specific economic developments.

Meet the minor currency pairs • EUR/GBP (Euro/British Pound) - Widely traded among European-focused investors
• EUR/AUD (Euro/Australian Dollar) – A popular choice for traders interested in the eurozone and Australian markets
• GBP/JPY (British Pound/Japanese Yen)
• AUD/JPY (Australian Dollar/Japanese Yen)

3. Exotic Currency Pairs Exotic currency pairs are the least commonly traded and involve one major currency and one currency from an emerging or less-established economy. They often have wider spreads and lower liquidity than major or minor pairs, which can lead to increased volatility – but also increased potential profits when you work smart.

These pairs are acutely impacted by political and economic developments in both countries, often presenting an ‘East meets West’ fusion of worlds. This factor also has the ability to attract traders from unlikely markets.

Meet the exotic currency pairs
• USD/TRY (US Dollar/Turkish Lira)
• EUR/TRY (Euro/Turkish Lira)
• USD/SGD (US Dollar/Singapore Dollar)
• EUR/SGD (Euro/Singapore Dollar)
• USD/ZAR (US Dollar/South African Rand)
• And many more

Your quick guide to the 3 types of currency pairs
1. Major currency pairs offer high liquidity and stability, making them suitable for beginners and seasoned traders alike.
2. Minor currency pairs allow traders to diversify their portfolios beyond pairs that include the USD.
3. Exotic currency pairs provide opportunities for higher returns, but come with increased potential risk because of their lower liquidity.

Remember that to succeed in the Forex market, it’s important to choose currency pairs that align with your risk tolerance and trading objectives. It’s also highly beneficial to stay informed about the economic factors that impact each currency pair’s exchange rate.