Most people know that currency pairs are traded in pairs, and a trader can make a profit as one currency's value changes against another. But which currency pairs to trade? And what are the differences between them?
Currency pairs fall into three categories - majors, crosses and exotics.
Major forex pairs
Major forex pairs are pairs that consist of a major currency and the US dollar, such as:
AUD/USD - Australian and US dollars
EUR/USD - Euro and US dollar
GBP/USD - British pound and US dollar
NZD/USD - New Zealand and US dollars
USD/CAD - US and Canadian dollars
USD/CHF - US dollar and Swiss franc
USD/JPY - US dollar and Japanese Yen
Some features of the major forex pairs include:
• Many of the major forex pairs move in similar patterns - for example, the EUR/USD and GBP/USD usually move in the same direction, so if one is moving up or down, it is likely that the other will follow the same trend, though the GBP/USD is a bit more volatile.
• As the CHF is another European currency, it also moves in correlation with the EUR and GBP. As the major currency pair is USD/CHF (the US dollar being the first named currency), this means that it will move in negative correlation with the EUR/USD and GBP/USD, so it will trend in the opposite direction.
The EUR/USD is the most widely traded pair, making up about 27% of total trading volume, so it is also the most liquid of the major currency pairs. It is also the pair that many beginners feel most comfortable with - due to its liquidity it is possible to profit in short time frames, which is cheaper as you won't have as many interest charges, and there is constantly information available about this pair online and in the news.
Commodity currencies
A commodity currency is the currency of a country that depends heavily on the export of raw minerals for income - the Australian, Canadian and New Zealand dollars are considered to be both major and commodity currencies.
Forex crosses
A cross is a pair of currencies that does not include the US dollar, such as:
AUD/CAD - Australian and Canadian dollars
AUD/CHF - Australian dollar and Swiss franc
AUD/JPY - Australian dollar and Japanese yen
AUD/NZD - Australian and New Zealand dollars
CAD/JPY - Canadian dollar and Japanese yen
CHF/JPY - Swiss franc and Japanese yen
EUR/AUD - Euro and Australian dollar
EUR/CAD - Euro and Canadian dollar
EUR/CHF - Euro and Swiss franc
EUR/GBP - Euro and British pound
EUR/JPY - Euro and Japanese yen
EUR/NZD - Euro and New Zealand dollar
GBP/AUD - British pound and Australian dollar
GBP/CHF - British pound and Swiss franc
GBP/CZK - British pound and Czech crown
GBP/JPY - British pound and Japanese yen
NZD/JPY - New Zealand dollar and Japanese yen
The most watched crosses are AUD/JPY, EUR/JPY, GBP/JPY and NZD/JPY.
Exotic forex pairs
Exotic forex pairs are currency pairs that comprise currencies of developing and emerging economies, such as:
USD/TRY - US dollar and Turkish lira
EUR/TRY - Euro and Turkish lira
USD/ZAR - US dollar and South African rand
USD/MXN - US dollar and Mexican peso
USD/SGD - US dollar and Singapore dollar
It isn't usually recommended that beginners start trading in exotic forex pairs for a number of reasons:
1. Exotics are much less liquid than major pairs, which means they have wider bid/offer spreads (a spread is the difference between the buy and the sell price - the wider this is, the more you need a currency to move to make a profit) than the major forex pairs.
2. When exotics do move, they can be very volatile and unpredictable.
3. There is less information available about these pairs than the major currency pairs, or even crosses.
It is usually best to start trading with a couple of forex pairs at a time, and build a winning strategy before adding more currency pairs to your portfolio.
Ezine - Check out my blog Talking Forex - a beginner's guide to forex to learn more about safe haven currencies. Also, the site of my preferred forex provider has a lot of good information on forex trading, including examples and FAQs.
I am not a financial adviser, and the information in this blog is just intended to inform and not advise. Please remember that forex is a leveraged product, so it's possible to lose more than your original investment. Forex trading might not suit everyone, so please ensure that you fully understand the risks involved with this type of trading.
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