Forex trading is all about the movement of one currency and how it affects another. When you are trading, you are buying or selling one currency in exchange for another. Every time you are in the Forex market, you will be working with Forex currency pairs. For this reason, a sound understanding of currency cross pairs is vital.
Definition of currency pairs
There are several currencies in Forex trading you can trade with. Though most traders normally stick with the major currency pairs. We will discuss later what the major pairs are. Now, currency pairs are basically any pair of two currency, like, EUR/USD, GBP/USD, USD/JPY, etc. The first currency of a pair is called the base currency and the other one is called quote the currency. Let’s say for EUR/USD, here EUR is the base currency and USD is the quote currency. When trading, you are buying or selling the base currency, here is it EUR, with respect to the quote currency, which is USD here. In your trading platform, it shows how much quote currency you would need to buy a unit base currency at any instant of time. That’s why the majority of traders want to work with popular currency pairs for because of their more liquid nature.
In Forex trading, currency pairs always quote with two different prices. They are called bid price and ask price. By the bid price, we understand the rate of the price at which the traders can sell their currency, and with ask price means the rate at which the traders can buy their currency. These price rates change over time with the fluctuation of the currency market. Every trading individual wants to buy their currency at a lower price and sell at a higher one. There is a small difference between the bid and ask price, popularly known as the spread. Spread is the commission or share that the brokers earn from every trade you make.
If you want to learn more in details, you can visit the website of Saxo. They have enough free resources which you can use to educate yourself properly.
Popular currency pairs
You will find a good number of currency pairs available on any platform. But all of them are not as popular as the other based on liquidity. To give you an example the USD is the most liquid currency in the world. While the NOK (Norwegian krone) is not that popular compared to the USD or the EUR. Forex professionals try to categorized different currency pairs based on their liquid nature and popularity among the trading communities. Some commonly practiced categories are major, minor and exotic currency pairs.
Major currency pairs consist of the most frequently used currencies. But one of the pair has to be U.S. dollars (USD). The movement of the financial market is always involved with currency liquidity. This is why major crosses consist of the most liquid of the many pairs. If you compare them with another two popular categories, the price movement is more frequent and regular for major pairs. This regular continuous movement of the market provides more opportunities for every individual. Here are some examples of major currency pairs, EUR/USD, USD/JPY, USD/GBP, AUD/USD, USD/CAD, etc.
Minor currency pairs are those which don’t contain the USD. Even though they are quite liquid and provide enough market movement but they are not frequently traded with. Minor currency crosses usually paired with the EUR, GBP, CHF, CAD, JPY, NZD, etc. Lastly, the exotic currency pairs consist of one of the major currencies, let’s say USD, with an emerging one like BRL, HDK, SAR, RUB, ZAR, etc. Exotic pairs relate highly to the economic and political events of the respective countries.
Now that you have learned about the major currency crosses, you will be able to decide which one is more preferred to your trading style. Though the day traders typically stick to the major pairs, you can also experiment with other pairs or exotic ones to come up with new strategies.