A currency pair is the basis of every trade in forex trading. Two currencies-the base currency and the quote currency-make up the currency pair. The base currency is the first in the pair while the quote is the second one. In showing the price for a currency pair, it displays how much of the quoted currency is necessary to acquire one unit of the base currency.
For example, the EUR/USD pair has the euro base currency and the US dollar as quoted. At a rate of 1.2000, it means one euro equals 1.20 US dollars. This price changes up to the end of the trading day due to reports on economic data, political activities, and actions of the central banks.
There are three general divisions of currency pairs: major pairs, minor pairs, and exotic pairs. Major pairs are the most frequently traded among all and also contain the most liquid currencies in the world. These pairs always consist of the US dollar and another major currency, for instance the euro, British pound, or Japanese yen. Major pairs include EUR/USD, GBP/USD, and USD/JPY. Major pairs tend to have the smallest spreads, which come in very handy for most traders who want to find liquidity and relatively lower risk. These pairs are stable, have large trading volumes, and tight price fluctuation. Thus, they are generally easier to trade and offer constant opportunities.
Minor pairs, commonly known as cross-currency pairs, do not contain the US dollar. However, they are instead two major currencies from other countries, such as EUR/GBP or AUD/JPY. Although these pairs are also very liquid, they are generally somewhat less stable than the major pairs. Also, the spreads of the minor pairs are usually wider, increasing trading costs. However, the slightly higher volatility can prove profitable for traders who are in a position to take higher risks.
Exotic pairs are the lowest traded and have one major currency and another currency issued in an emerging or smaller market. Examples of exotic pairs include USD/TRY (US dollar and Turkish lira) or EUR/ZAR (Euro and South African rand). These are typically more volatile, with wider spreads and are riskier for traders. However, such pairs can provide great profit potential, especially for experienced traders, who are aware of the peculiar economic conditions in these smaller markets involved. Exotic pairs can be influenced by local events, such as political instability or commodity price changes that could lead to enormous price swings.
When picking which currency pair to trade, a trader needs to know the factors that affect exchange rates. Economic information includes GDP growth, employment, and inflation levels. Geopolitical issues, such as elections, a trade war, or natural disasters, are significant causes of sharp price movements. Central bank decisions regarding interest rates and monetary easing are strong forces in currency prices. Accordingly, each currency pair behaves differently based on these factors, and so traders must study how they react to various market conditions to make informed decisions.
All in all, regardless of the traded major, minor, or exotic pair, knowledge about the markets and what drives movements will bring a trader success. Forex trading has so much to offer but at the same time demands specialized knowledge and skill required when finding one’s way through the market. With knowledge and recent world events affecting currency pairs, it is possible for any trader to boost his or her prospects for some gainful trading in the market, which is Forex.