A currency pair is a financial instrument that allows you to trade on the Forex. Its essence lies in the ratio of the value of two monetary units of different states. When buying one currency from a pair, another is automatically sold. The two currencies indicated in the pair form the exchange rate.
The currency indicated in the pair first is called the base, and trading operations are performed with it. The second is the name of the quote, which determines the value of the base currency for which it is put up for auction. Often, the base currency is compared with the product and the quote currency with its price. For example, in the EUR/USD pair, the euro (EUR) will be the base currency, and the USD will act as a quote.
A currency pair is the ratio of two world currencies that determine the exchange rate and are objects of trade in the foreign exchange market. In the name of a currency pair, the sequence of indicating currencies is mandatory: the base currency is always indicated first, followed by the quoted currency.
Depending on the main characteristics, currency pairs are divided into two main groups: major currencies and exotic currencies. We will have both currency pairs in trading explained in this article and give you insight into why both are very attractive and important to Forex traders.
Major currency pairs
A major currency pair is the most sought-after instrument in the entire financial market. Major currency pairs always include the American dollar, are the most popular in the global currency market, and have increased liquidity. Major currency pairs contain 7 traditional pairs, trading operations in this group occupy 70% of the total turnover of Forex currency trading.
Each currency pair in this group is a union of the US dollar with the quoted currencies of other countries. The main currencies on the world market are Euro, American dollar, British pound sterling, Swiss franc, Canadian dollar, Australian dollar, Japanese yen.
Dollars are the central currency in Forex trading. Non-dollar currency pairs are also actively used, but increased demand still goes to pairs with the American dollar.
This primarily comes from the fact that the main currency pairs have large volatility indicators, which has a significant impact on trade. Secondly, it is profitable to work with the above tools, as they have a fairly low spread. The main currency duets for short-term trading are especially relevant.
Thirdly, most of the forecasts and analytical studies are compiled for the currency pairs of the main group. The world market leader is the EUR/USD currency pair (Euro/US dollar), which is actively used on the trading market of all countries except Asian countries, where interest in this pair is slightly lower than in the markets of the United States and Europe.
Exotic currency pairs
Exotic currency pairs involve a combination of the main currency (US dollar and Euro) and the currencies of developing countries (South Africa, Brazil, India) or economically developed small countries (Norway, Czech Republic). These pairs are not traded as often as the currency duets of the main and non-main groups; therefore, relatively high spreads are characteristic of this group.
The USD/RUB currency pair (dollar/ruble) for instance is an exotic duo, and the volume of transactions on it was very low until recently. The currency pair EUR/RUB (euro/ruble) is unusual, because, despite its exotic nature, it is quite in demand on Forex. Russian news affects the ruble, the EU news feed on the euro. The most dynamic bidding for this pair takes place during the European session.
Exotic pairs have a high spread; they are poorly liquid and differ in poorly predicted movements. Only especially stubborn traders and increasingly experienced people trade on them. An ordinary trader could find it extremely hard to trade on exotic pairs – it is a waste of time and additional headache.
Many traders generally concentrate on just one tool and at the same time, make good money. Nobody has a dual specialization in currency pairs. And when trading multiple currencies at the same time, you pay less attention to each individual chart and may well miss some important detail in the analysis. However, when using a portfolio of currencies, you can get a smoother yield curve due to a large number of transactions.