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Why do you buy and sell currency pairs in forex trading?

Why do you buy and sell currency pairs in forex trading?

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Ask a trader who is the most influential central bank, and the answer should unequivocally be the Federal Reserve. Then, ask the same traders which central bank has the hardest job in setting policy, and you’ll most likely hear them say “the ECB” – They have to set policy for 19 different countries, where a one-size fits all model is fraught with challenges – all the while, the Eurozone is most exposed to the Ukraine conflict, has very high supply-side driven inflation and a looming energy crisis.

Forex trading is the simultaneous exchange of two distinct currencies.

When currencies are exchanged, they are “traded in pairs” through a broker or dealer. The value of one currency is expressed in relation to another. For example, the British pound and the Japanese yen (GBP/JPY) or the euro and the U.S. dollar (EUR/USD).

When you trade in the forex market, you buy or sell in currencies in pairs.

Think of each currency pair as being in a constant state of “tug of war,” with each currency being on a separate side of the rope.

The relative cost of two currencies from two distinct nations is known as an exchange rate. The exchange prices alter according to which currency is more powerful at that very moment.

The three types of currency pairs include:

The “majors

The “crosses

The “exotics

The U.S. dollar is always present in the major currency pairs.

The US dollar is not included in cross-currency pairs. Crosses that involve any of the major currencies are also known as” minors”.

One major currency and one currency from an emerging market make up exotic currency pairs (EM).

What is defined as “Major Currency Pairs?

The following currency pairs mentioned in the below chart are referred to as the “majors.” These are the most traded pairsbecause they all have the U.S. dollar (USD) on one side.

The majors have more frequent price movements than the crosses and exotics, which creates more trading opportunities.

The world’s most liquid markets are the majors. The level of activity that takes place in the financial market is known as “liquidity.”

In forex, it depends on how many traders are actively buying and selling a certain currency pair, as well as how much is being exchanged. The more frequently something is traded, the higher its liquidity.

In forex, it depends on how many traders are actively buying and selling a certain currency pair, as well as how much is being exchanged.

For example, more people opt to trade the EUR/USD currency pair than the AUD/USD currency pair. As a result, EUR/USD is more liquid than AUD/USD.

Currency PairCountriesFX Geek Speak
EUR/USDEuropean Union/United States“Euro Dollar”
USD/JPYUnited States/Japan“Dollar Yen”
GBP/USDUnited Kingdom/United States“Pound Dollar”
USD/CHFUnited States/Switzerland“Dollar Francs”
USD/CADUnited States/Canada“Dollar Loonie”
AUD/USDAustralia/ United States“Aussie Dollar”
NZD/USDNew Zealand/United States“Kiwi Dollar”

What is the difference between Major Cross-Currency Pairs or Minor Currency Pairs?

Cross-currency pairs, also referred to as “crosses,” are sets of currencies that do not include the U.S. dollar (USD).

Major crosses are also known as “minors.”

The crosses are still fairly liquid and continue to offer a variety of trading opportunities, although they are not traded as frequently as the majors.

The three most popular non-USD currencies, the EUR, JPY, and GBP, are the sources of the crosses that are most frequently traded.

The most actively traded crosses are derived from the three major non-USD currencies: EURJPY, and GBP.

EURO Crosses:

Currency PairCountriesFX Geek Speak
EUR/CHFEurozone / Switzerland“euro swissy”
EUR/GBPEurozone / United Kingdom“euro pound”
EUR/CADEurozone / Canada“euro loonie”
EUR/AUDEurozone / Australia“euro aussie”
EUR/NZDEurozone / New Zealand“euro kiwi”
EUR/SEKEurozone / Sweden“euro stockie”
EUR/NOKEurozone / Norway“euro nockie”

Yen Crosses:

Currency PairCountriesFX Geek Speak
EUR/JPYEurozone / Japan“euro yen” or “yuppy”
GBP/JPYUnited Kingdom / Japan“pound yen” or “guppy”
CHF/JPYSwitzerland / Japan“swissy yen”
CAD/JPYCanada / Japan“loonie yen”
AUD/JPYAustralia / Japan“aussie yen”
NZD/JPYNew Zealand / Japan“kiwi yen”

Pound Crosses:

Currency PairCountriesFX Geek Speak
GBP/CHFUnited Kingdom / Switzerland“pound swissy”
GBP/AUDUnited Kingdom / Australia“pound aussie”
GBP/CADUnited Kingdom / Canada“pound loonie”
GBP/NZDUnited Kingdom / New Zealand“pound kiwi”

Other Crosses:

Currency PairCountriesFX Geek Speak
AUD/CHFAustralia / Switzerland“aussie swissy”
AUD/CADAustralia / Canada“aussie loonie”
AUD/NZDAustralia / New Zealand“aussie kiwi”
CAD/CHFCanada / Switzerland“loonie swissy”
NZD/CHFNew Zealand / Switzerland“kiwi swissy”
NZD/CADNew Zealand / Canada“kiwi loonie”

Exotic Currency Pairs

Here one major currency is matched with the currency of an emerging country, such as Brazil, Mexico, Chile, Turkey, or Hungary, to form exotic currency pairs.

Depending on your forex broker, you may see the following exotic currency pairs so it’s good to know what they are. Keep in mind that these pairs aren’t as heavily traded as the “majors” or “crosses,” so the transaction costs associated with trading these pairs are usually bigger.

The chart below contains a few examples of exotic currency pairs:

Currency PairCountriesFX Geek Speak
USD/BRLUnited States / Brazil“dollar real”
USD/HKDUnited States / Hong Kong 
USD/SARUnited States / Saudi Arabia“dollar riyal”
USD/SGDUnited States / Singapore“dollar sing”
USD/ZARUnited States / South Africa“dollar rand”
USD/THBUnited States / Thailand“dollar baht”
USD/MXNUnited States / Mexico“dollar mex”
USD/RUBUnited States / Russia“dollar ruble” or “Barney”
USD/PLNUnited States / Poland“dollar zloty”
USD/CLPUnited States/ Chile 

Spreads that are two or three times larger than those of EUR/USD or USD/JPY are pretty common.

Exotic currency pairs tend to be far more susceptible to economic and geopolitical events because of the overall lower degree of liquidity. An exotic pair’s exchange rate, for example, could change drastically in response to a political scandal or unexpected election results. So, if you want to trade exotic currency pairs, remember to factor this in your decision.

Let’s recap what we have learned about currency pairs.

What is a currency pair in forex?

A currency pair is a set of two currencies where each one’s value is compared to the other. GBP/USD, for instance, represents how much the British pound is worth in relation to the US dollar.

What are the major currency pairs?
Major currency pairs (sometimes referred to as “majors”) are the most traded and include the U.S. dollar. They are the EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD, and NZD/USD pairs, which total seven.

What are the currency crosses?

The more popularly traded currencies that DO NOT pair with the US dollar are referred to as “crosses.” Crosses include GBP/JPY, EUR/GBP, EUR/CAD, EUR/CHF, and EUR/JPY, among others.

How many currency pairs exist?

There are HUNDREDS of currency pairs in existence but not all can be traded in the FX market. The United Nations currently recognizes 180 currencies. It’s a lot if you were to couple every currency with another.

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