Forex currency pairs explained – How to trade them

When trading Forex, you are dealing with currency pairs. A currency pair consists of two different currencies, and the price of the currency pair represents the exchange rate between the two. If you are trading the EUR/USD currency pair, Euro is the base currency, while the US dollar is a quote currency.

This means that when you are buying a pair, you are buying the base currency while selling the quote currency. If you are selling the pair, you are buying the second currency and selling the base currency.

There are three types of currency pairs in Forex, Majors, Minors, and Exotics. Understanding currency pairs basics might take some time, so, let’s dive deep into Forex trading currency pairs and discover everything you need to know.

Different types of currency pairs in Forex

currency pairs in ForexThere are three types of currency pairs available in Forex, they are Majors, Minors, and Exotics. All of these three are very different from one another. Deciding which currency type to trade is a very personal choice and mostly depends on your knowledge and experience.

It’s not easy to choose a specific currency pair to trade. Even the most experienced traders are sometimes having a hard time making that decision. Before we go any further, let’s discuss the Forex pairs meaning.

In Forex, currency pair is the quotation of two different currencies, with the value of the one currency being quoted against the other. Currency pairs are comparing the value of a certain currency to another.

Unlike other markets, for example, stock and commodity trading, in Forex, you trade currencies. This means that you are selling one currency to buy another one. In stocks and commodities trading, you are using cash to buy a part of the shares.

As we have already said, there are three types of Forex pairs available in the market. So, let’s discuss them one-by-one.

Trading major currency pairs

Major currency pairs are made up of USD and one other major currency. The most traded currency pair, EUR/USD is actually a major currency pair. It is made up of the Euro and US dollar.

As we have already said, when you are trading the EUR/USD currency pair, you are buying EUR, which is the base currency, and selling USD, which is the quote currency. Sometimes quote currency is also called a counter currency.

Other major currency pairs include USD/CHF, AUD/USD, USD/CAD, USD/JPY, and GBP/USD. In some cases, AUD/USD and USD/CAD are called commodities currencies because Australia and Canada are very rich when it comes to commodities.

The price of the national currencies in these countries largely depend on the prices of commodities, thus, many people call these currency pairs commodities currency pairs.

Currency pairs list – Minor currency pairs

Minor currency pairs are made up of major currency pairs, however, they do not include USD. These currency pairs are sometimes also called cross currency pairs. In most cases, they are not as liquid as the major currency pairs, but the liquidity of minor pairs is still sufficient for most traders. As for spreads, they are wider for minors currency pairs. Some of the most popular minor currency pairs include EUR/GBP, EUR/CHF, and others.

Forex pairs explained – Exotic currency pairs

Exotic currency pairs are the ones that are made up of emerging market currencies. The liquidity of exotic currency pairs is significantly lower, and the spreads are much wider. Some of the most popular exotic currency pairs include EUR/TRY, GBP/ZAR, AUD/MXN, and others.

Although these currency pairs are not as popular as Majors and Minors, there still are a lot of people who trade them on daily basis.

What are the basics of reading currency pairs?

reading currency pairsAs we have already said, in the currency pair, the first one is the base currency and the second one is the quote currency. There are as many currency pairs available in the market as currencies themselves. The number of currency pairs is changing very frequently, as new currencies are adopted or the older ones are changed, new currency pairs are born as well.

Before you start trading currency pairs, there are some basics that you should know. The Forex trading market is open 24 hours a day, 5 days a week. Because of this, there always is someone who is trading Forex.

There are two concepts that you might have to understand before you start trading Forex. They are bid and aks. The bid represents the buying price of a certain currency pair. Basically, the bid is the amount of quote currency you will need to pay to buy the base currency.

Ask, on the other hand, is the selling price. It is the amount of quote you will get when you decide to sell one unit of the base currency. Unlike other trading markets, when you are trading Forex, you are buying one currency while selling another one.

Which currency pairs are the most popular?

It should not come as a surprise that the most popular currency pairs in Forex trading are the major currency pairs. People love to trade these Forex profitable pairs because it is much easier to get needed information about them.

They are known to be the strongest currency pairs globally, and the dominant Forex trading market. One of the biggest reasons why major currency pairs are so popular is their liquidity. Because of high liquidity, major currency pairs can be traded in larger volumes. As for the currency itself, the most traded one is the US dollar.

What influences Forex pairs value?

forex pairs valueThere are many things that influence the price of the currency pairs. For example, the price of the currency pair can be affected by changes in overnight interest rates by central banks, economic data, and political events globally.

In Forex, central banks play a huge role. One of the main jobs of central banks is to maintain monetary and financial stability in their countries. For this, they are influencing changes in the interest rates.

If the central bank decides to increase the interest rates, the demand for the currency is also increased. Another factor that might influence the changing price of a certain currency is the economic data. These releases give traders a general idea about how the economy of the country is performing.

This way, traders can make decisions regarding which currencies they want to buy, and which they want to sell. Currency pairs also are frequently affected by the ongoing events in politics around the world, for example, elections or political instability.

We have all seen how much the Coronavirus pandemic had influenced the Forex market as well. During times of crisis, many people decide to invest in safe-haven assets. In the case of Forex, USD is considered to be a safe-haven currency. Because demand increases so much on USD during the crisis, its price is more likely to increase during times of instability.

To determine how the price is going to change, many people are using different types of indicators and even a currency pairs calculator, which gives them a better idea of how the prices might change.

Best Forex pairs for beginners

Many people are having a hard time understanding which currency pair to trade. This is a very personal thing and largely depends on the experience that you have not only in the Forex trading market but also with the currency that you want to trade.

forex pairs for beginnersIf you are someone who is from a developing economy and you know your national currency very well, you might be able to successfully trade exotic currency pairs. On the other hand, if you are a total beginner from the US or Europe, you might prefer to trade major currency pairs because you will be able to easily access information about those pairs.

While trading Forex, you will have access to many analytical tools. This way, you will be able to better tell which way the market might go, and which decisions are better to make. In total, there are more than 200 currencies around the world. However, you might not be able to trade all of them. In most cases, it largely depends on the Forex broker that you are using and the trading platform offered by the broker.

Also, before choosing which currency pairs Forex to trade, you should consider the trading strategy that you want to use. If you are trading currency pairs that are changing drastically in a considerably shorter time, it might be better to use short-term trading strategies such as scalping for example.

Why are so many people trading major currency pairs?

Among different Forex pairs categories, as we have already said, the most popular ones are the major currency pairs. The major currency pairs make up 75% of all Forex trades. This significant number shows that a huge majority of Forex traders prefer to use major currency pairs.

They are the most liquid and widely traded in the market. These pairs have the largest volume of buyers and sellers, because of which, they mostly have the tightest bid and ask spreads as well. Also, they are more likely to be stable than other currency types, which is another reason why so many people are using major currency pairs.

What will you need to start Forex trading?

Now that you have learned the basics of currency pairs, it is time for you to take your first steps in Forex trading. First of all, you will have to find a Forex broker and create a live trading account.

The next step is to make your deposits, choose a trading platform offered by the broker, and start opening your positions. Remember that there are a lot of things involved in Forex trading. For best results, it is a smart idea to follow different types of indicators and tools.

There are a lot of things that a trader should keep in mind, so don’t forget to do your research before you start trading Forex.

Final thoughts on currency pairs to trade

In Forex trading, currency pairs are something that you will be dealing with at all times. As you already know, there are three types of currency pairs in Forex: Majors, Minors, and Cross currency pairs. These currency pairs are very different from one another. Choosing the best one for trading largely depends on your needs and wants in Forex trading.

Reading a currency pair should not be that hard. The first one that you see in the pair is the base currency, and the second one is the quote currency. When you are buying a pair, you are selling the quote currency to buy the base currency and vise versa. Understanding currency pairs in Forex is an essential aspect of this market.

Frequently Asked Questions on understanding currency pairs

What are the most liquid currency pairs?

By definition, liquidity in Forex is the ability of a currency pair to be traded on demand. The forex trading market is very liquid, but the most liquid currency pairs are the major currency pairs. Major pairs can be bought and sold in significantly large sizes without huge variances in their exchange rate. Some of the pairs with the highest liquidity are EUR/USD, GBP/USD, USD/JPY, and others.

On the other hand, there are other currency pairs that are low in liquidity. Thus, they cannot be bought or sold in significant sizes without large variances in their exchange rate. A great currency pair example for this is PNL/JPY.

How do you read a currency pair?

When you look at the currency pair, the first currency that you see is the base currency, and the second one is the quote currency, sometimes also called variable currency. When you are trading, a currency pair will almost always show two different prices. They are bid and ask prices. Bid in Forex means the price that you will sell the currency, and the ask is the price that you will be the currency.

What is the most traded currency pair?

The most traded currency pair is the EUR/USD, and it is made up of the world’s largest and most reputable currencies. EUR/USD is generally associated with very low spreads, high liquidity, and the ability to place large volumes of trade. Another very popular currency pair is the USD/JPY. Similarly, it boasts high liquidity and tight spreads.

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