In the forex market, currencies are always traded in pairs. A currency pair indicates the value of one currency in terms of another, referred to as the base currency and the quoted currency. In this way, the trader determines the value of their quoted currency against the base currency.
What Are Forex Currency Pairs?
Forex currency pairs represent the exchange rate between two currencies, where one currency is traded against another in the foreign exchange market. Each pair consists of a base currency (the first currency) and a quote currency (the second currency), indicating the number of units of the quote currency required to purchase one unit of the base currency.
Understanding the structure of a Currency Pair, a foreign exchange currency pair is made up of two currencies:
- Base Currency: Thus, the value of one currency concerning another is expressed in pairs, whereby the first currency in the pair (EUR in the example EUR/USD) is called the ”base currency”- EUR in the example.
- Quote Currency: The value of that one unit of the base currency concerning the counter currency is a denomination of the second currency (for instance, USD in the case of EUR/USD).
Disclaimer: Educational content only; results vary by trader.
Categories of Currency Pairs
Understanding the Categories of Currency Pairs
Understanding Major, Minor, and Exotic Currency Pairs
1. Major Pairs
The major pairs comprise the most liquid and actively traded currency pairs in the forex market, typically featuring the USD against another primary currency. Examples of this include EUR/USD, GBP/USD, USD/JPY, and USD/CHF, all of which exhibit narrow spreads, high liquidity, and low volatility. Hence, they are favoured by novices in forex trading.
2. Minor Pairs
Most cross-currency pairs exclude the USD as the base currency and typically involve powerful currencies, such as the Euro, British Pound, or Japanese Yen. Some examples include minor currency pairs such as EUR/GBP, GBP/JPY, and EUR/AUD. They offer moderation in volatility and spreads; thus, trading on them brings varied moves with minimal risk.
3. Exotic Pairs
Exotic Pairs: Uncover the Potential for Profit
Types of currency pairs
1. EUR/USD (Euro/US Dollar)
The EURUSD, as the leading trading pair worldwide, should offer very competitive spreads. It encompasses all types of traders, examining the relationship between the United States and the Eurozone.
2. USD/JPY (US Dollar/Japanese Yen)
USDJPY flows are influenced by US bond yields and market sentiment, which explains its high liquidity as well as aggressive trading by speculators betting on interest rate spreads between the two countries.
Read The Latest Trade Development Between the two countries: US-Japan Trade Deal Shakes Markets with Bold Auto Pact
3. GBP/USD (British Pound/US Dollar)
Characteristics such as extreme turbulence and volatility define the GBP/USD, also known as the Cable, the name commonly given to that currency pair. It offers many opportunities for trading, particularly during the European and US session overlaps when British and American economic data are released.
4. AUD/USD (Australian Dollar/US Dollar)
These pairs typically track commodity prices, especially gold, centres as they have significant AUD/USD trading potential, since Australia’s economy is heavily resource-driven. This provides a smoother trend under easier conditions for swing traders and those tracking global commodities.
Related Reading: RBA Surprises Markets With Rate Hold as U.S. Delays Tariff Hikes
5. USD/CAD (US Dollar/Canadian Dollar)
The USD/CAD pair is nicknamed the “Loonie” because it is influenced by crude oil prices, which are a key factor in Canadian oil exports. A highly liquid pair, it is popular among speculators who consider oil market trends in conjunction with North American economic developments.
6. USD/CNY (US Dollar/Chinese Yuan)
The USD-CNY exchange rate reflects the economic relationship between the USA and China. Heavily influenced by China’s central bank, the pair is affected by trade relations, government intervention, and sentiment among traders, offering unique opportunities for macroeconomic players with a long-term perspective.
7. USD/CHF (US Dollar/Swiss Franc)
The USD/CHF pair is often referred to as the “Swissie”, as it is widely considered a haven trade. The Swiss Franc strengthens as uncertainties creep up in the market. In this case, the pair also trades based on global risk sentiments, US economic data, and to some extent, the stability of the Swiss banking sector.
8. USD/HKD (US Dollar/Hong Kong Dollar)
The linking of Hong Kong’s currency to that of the United States will make a significant difference in the equilibrium established for the USD/HKD currency pair. This pair generates income, technically, due to its controlled monetary policy, which allows for limited but stable opportunities for institutional or long-term traders.
9. EUR/GBP (Euro/British Pound)
The exchange rate EUR-GBP broadly represents the relative strength of the Eurozone or European economy versus the UK economy. Traders combine speculations regarding political events in Europe, Brexit processes, and other monetary policy differences, generating moderate volatility with fairly reliable setups for short- and medium-term trading.
Finding Your Forex Favourite Currency Pairs?
To find your favourite currency pairs in forex, you must analyse the stability and liquidity of major pairs, EUR/USD, GBP/USD, and USD/JPY. Even analyse the economy, volatility, and forex market hours that fit with your strategy. Test them all and determine which one aligns with your risk tolerance and trading style.
Popular Major Currency Pairs for Beginners
Currency Pair Nickname Reasons to Trade
- EUR/USD Fiber Low spreads, high liquidity, predictable moves
- GBP/USD Cable: High volatility, major economic influences
- USD/JPY Ninja Low spreads, liquid, sensitive to news
- USD/CHF Swissy Stable, low spreads, safe-haven asset
- AUD/USD Aussie Commodity-driven, responsive to risk sentiment
The Significance of Choosing the Right Pair Using a correct currency pair can pave the way to success in forex trading. Some are relatively stable, while others create so much volatility that traders can usually expect huge profits. When this balances with your risk tolerance and trading approach, you will understand perfectly how to pair them.
Factors to Consider When Choosing Your Favourite Currency Pairs
1. Volatility and Liquidity
The term volatility signifies the oscillation of prices, while liquidity implies the ease of buying and selling in response to price alterations. Major pairs include EUR/USD and USD/JPY, which are considered liquid and moderately volatile, making them best suited for new entrants. If you are particularly interested in rapid price movements, then GBP/JPY or XAU/USD (Gold) might be preferable.
2. Trading Sessions and Timing
Every currency pair also has its unique behaviour in trading sessions, such as Asian, European, or US sessions. For example, high action levels could be attained in EUR/USD pairs typically during the London and New York sessions. Knowing when one’s favourite pair is the most active would help align one’s trading schedule for utmost efficiency.
3. Economic and Political Factors
Economic indicators, such as interest rates, employment, and gross domestic product, have a greater impact on a currency’s strength. Countries with stable economies will have pairs with more predictable behaviour. For example, the USD/CHF is considered a safe currency pair due to Switzerland’s stable political environment.
Tools to Help You Analyse Currency Pairs
- Forex Calculators: These tools enable the calculation of pip values, potential profits, and loss-oriented figures, helping to plan trades efficiently and manage risks associated with currency pair fluctuations and lot sizes.
- Economic Calendars: The economic calendars update traders on major global events, economic indicators, and financial announcements that can impact currency values, enabling informed decisions and anticipating periods of potential market volatility.
- Trading Platforms: MetaTrader and other platforms offer sophisticated charts, technical indicators, and tools for analysing market trends, identifying entry points, and executing trades based on precise analysis of a given currency pair.
Conclusion
Figuring out your favoured currency pairs involves understanding their volatility, liquidity, and economic factors. Major pairs, trading sessions, and global factors should be analysed and mapped to your strategy. Conducting some experimentation will help you uncover pairs that align with your risk tolerance and trading goals. Visit AllWin Academy Now and become the trading expert by joining our courses!
FAQS
What are the 7 major currency pairs?
So how about looking into each of these seven major forex pairs a bit closer:
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CHF (Dolar/Swiss Franc)
- AUD/USD (Australian Dollar against US Dollar)
- USD/CAD (US Dollar / Canadian Dollar)
- NZD/USD (New Zealand Dollar / US Dollar)
Which currency pair is best for forex trading?
It is usual to say that the best currency pair to trade in the forex market is relative to your objectives and experience in trading. However, the most common and highly traded currency pair is the Euro/US Dollar. It provides a lot of liquidity, a low spread, and stable volatility, which is suitable not only for beginners but also for professional traders. Another set of the most successful pairs is GBP/USD, USD/JPY, and USD/CHF, which are stable and supported by practical market analysis. Traders typically prefer the major pairs due to their improved price movement and reduced transaction costs.
How to pick forex pair?
These are some of the essential considerations:
Liquidity and Trading Volume: The major pairs are usually the most liquid, making them easier to trade, particularly for shorter-term traders, as spreads are tighter and commissions are lower.
- Volatility and Risk Management
- Market hours and overlapping periods
- Stability in Economic and Political
