The 3 Main Categories of Currency Pairs in Forex Trading

The Forex market—a global trading platform with a daily turnover exceeding $6.6 trillion (source: Bank for International Settlements, 2019)—offers traders a wide range of currency pairs to choose from. These pairs are classified into three main categories: major, minor, and exotic pairs. Understanding the distinctions between them and their unique characteristics can empower traders to make more informed decisions and develop better strategies in Forex Trading Online.

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Major Currency Pairs

Major currency pairs in Forex Trading Online include the most traded currencies in the world, always featuring the U.S. dollar (USD) as the base or the quote currency. These pairs represent the most liquid and stable trading options, benefiting from low spreads and high trading volume. The 7 major currencies are as follows:

• EUR/USD (Euro/U.S. Dollar): The most traded pair accounts for 20% of global Forex transactions.
• GBP/USD (British Pound/U.S. Dollar): Known as “Cable,” this pair is popular for its liquidity.
• USD/JPY (U.S. Dollar/Japanese Yen): One of the most traded pairs in Asia.
• USD/CHF (U.S. Dollar/Swiss Franc): Considered a safe-haven pair, often traded during times of uncertainty.
• AUD/USD (Australian Dollar/U.S Dollar): Known as the “Aussie” – a commodity pair closely affiliated to the price of commodities.
• USD/CAD (U.S Dollar/Canadian Dollar): Known as the “Loonie” with its name derived from a bird called Loon. This picture appears at the back of the coin.
• NZD/USD (New Zealand Dollar/U.S Dollar): Nicknamed as the “Kiwi”. Just like Canada and Australia, this is a commodity currency.

Why Trade Major Pairs?

There are a couple of reasons why you should trade major pairs. One of these is its high liquidity. This ensures that traders can execute large trades without significantly affecting the market price. Another thing is the lower spreads. Brokers often offer tighter spreads for major pairs, making them cost-effective. Lastly, trading major currency pairs means a more stable market behavior. Major pairs are less prone to erratic price swings compared to exotic pairs.

Minor Currency Pairs

Minor currency pairs, also known as cross-currency pairs, do not include the U.S. dollar. They feature prominent currencies such as the euro (EUR), the British pound (GBP), and the Japanese yen (JPY). Common examples of minor pairs in Forex trading online are:

• EUR/GBP (Euro/British Pound): Popular in Europe, reflecting economic conditions in the Eurozone and the UK.
• EUR/JPY (Euro/Japanese Yen): A pair that combines European and Asian market dynamics.
• GBP/JPY (British Pound/Japanese Yen): Known for its volatility and larger price movements.
• GBP/CAD (British Pound/Canadian Dollar): these are the currencies of two high ranking global economies.
• CHF/JPY (Swiss Franc and Japanese Yen): known as a strong Asian currency and a powerful European one.
• EUR/AUD (Euro and Australian Dollar): known as minor because it doesn’t have USD.
• NZD/JPY (New Zealand Dollar and Japanese Yen): JPY – stable currency, NZD – growth currency.

Advantages of Trading Minor Pairs

Just like trading major pairs, trading minor pairs has their own advantages. One of which is diverse trading opportunities. Traders can explore different economic regions without involving the USD. Next is its potential for volatility. Minor pairs can offer more significant price movements, which can translate into higher profit potential for experienced traders. However, traders should be cautious of wider spreads and reduced liquidity compared to major pairs.

Exotic Currency Pairs

Exotic pairs consist of one major currency paired with a currency from an emerging or smaller market. Examples include:

• USD/TRY (U.S. Dollar/Turkish Lira)
• EUR/SEK (Euro/Swedish Krona)
• GBP/ZAR (British Pound/South African Rand)

Characteristics of Exotic Pairs

Knowing the characteristics of exotic pairs helps you acquire a good trading decision. Some of the characteristics of exotic currency pairs is its higher volatility. Due to economic and political factors, exotic pairs can experience dramatic price swings. Another thing is its wider spreads since these pairs often come with higher transaction costs, as liquidity is generally lower. Finally, there is a greater risk in trading exotic pairs. This is due to the less stable economies backing up exotic currencies.

Each category of currency pair—major, minor, and exotic—offers unique opportunities and challenges in Forex Trading Online. Major pairs provide stability and lower costs, making them ideal for beginners and those seeking consistent liquidity. Minor pairs open the door to diverse strategies by enabling trades involving strong global currencies outside the U.S. dollar. Meanwhile, exotic pairs cater to experienced traders willing to embrace higher risk for potentially greater rewards in Forex Trading Online.