The forex market is the most liquid one among other markets where banks, brokers, corporations, traders, investment and hedge funds actively participate in the exchanging operations and set the pace. You’re here to get to know how to make this "currency choice" and meet your trading forex objectives.
What is a Currency Pair?
A currency pair represents the quotation of two different currencies where the value of one currency is quoted against the value of another currency. A currency that goes first in the pair is defined as a base currency, whereas a currency that takes the second position in the pair is specified as a quoted currency (e.g., EUR (base currency)/USD (quoted currency)).
The second (quoted) currency indicates the sum that is needed to be paid to buy the unit of the first (base) currency. When it comes to opening the position, and a trader makes a decision to buy a currency pair, then he/she buys the base currency and sells the quoted currency, and vice versa; by choosing the sell option, a trader sells the base currency and buys the quoted currency. The quotation of a currency pair is based on its bid (buy) price and ask (sell) price.
For example, there is a EUR/USD currency pair with the bid (buy) price of 1.3500. That means that 1 euro can be exchanged for 1.3500 US dollars.
Determination of Prices in the Forex Market
Supply and demand is what determines the prices of the pairs. There are central banks that get involved in the price movements sometimes, but it usually happens when there is a risk that the price will dramatically increase or decrease, which, in its turn, can result in economic turbulence.
Supply and demand is what determines the prices of the pairs.
Supply and demand is determined by the fundamental conditions in each country, its economy, interest rates, future directions of the country/currency, and the financial needs of all market participants.
Read more: How to Read Currency Pairs
The Characteristics of Major Currency Pairs
Major currencies (majors) are the ones that are traded with the highest volume. Each currency pair includes the US dollar, which is also known as the world’s currency. So, here are the most active forex pairs we’re talking about: EUR/USD (the euro/the US dollar), GBP/USD (the British pound/the US dollar), USD/JPY (the US dollar/the Japanese yen), USD/CHF (the Swiss franc/the US dollar), USD/CAD (the Canadian dollar/the US dollar), AUD/USD (the Australian dollar/the US dollar).
Major currencies (majors) are the ones that are traded with the highest volume.
High trading volume attracts even more volume (traders are highly interested in buying and selling these currencies) – this is what happens with the above-mentioned majors. Another important point is that major pairs have smaller spreads (broker’s commission for the provided services). As you can see, it’s a never-ending circle.
In case you’re still puzzled to understand what high trading volume means and what advantages it has, let us explain: High volume signifies that traders can easily enter and exit trades no matter what position size they choose, or, in other words, buying and selling a certain instrument becomes easy.
Read more: How to Buy and Sell Forex for Beginners
Minors and Exotics
Those currency pairs that don’t include the US dollar are called minor currencies or cross-currency pairs. When it comes to trading, these currencies have higher spreads, and they aren’t as liquid as majors. Despite the fact that minors include the major currencies, they still have lower trading volume and, we hope, you understand why. Here are some of them: EUR/GBP (the euro/the British pound), EUR/AUD (the euro/the Australian dollar), GBP/JPY (the British pound/the Japanese yen), CHF/JPY (the Swiss franc/the Japanese yen) and others.
Those currency pairs that don’t include the US dollar are called minor currencies or cross-currency pairs.
Exotic pairs include majors and the currencies of developing countries (such as India or Brazil). Traders who prefer trading exotic currency pairs should be ready for higher spreads and low liquidity. Exotic currency pairs include GBP/ZAR (the British pound/the South African rand), EUR/TRY (the euro/the Turkish lira), USD/HKD (the US dollar/the Hong Kong dollar), AUD/MXN (the Australian dollar/the Mexican peso) and others.
Choosing the Best Currency Pairs to Trade
Choosing a currency pair for trading strongly depends on your expertise as a forex trader. If it’s just the beginning of your journey, then it’s better to focus on majors since they’re easier to trade and have lower spreads. Talking about minors and exotics, you don’t need to be a professional to trade them, but you still need to clearly understand their specifics – higher spreads, tight liquidity.
Yes, it’s possible to get profit trading different pairs as long as you stick to your trading strategy and analyze the market direction.
There aren’t right or wrong choices when it comes to trading. It’s your experience. The important thing is that you should always analyze your suggestions and make rational decisions. What are the best currency pairs to trade for beginners? Being a novice trader, don’t even try to trade a few currency pairs simultaneously. Start with one major pair, learn its hidden pitfalls and understand its movements in the market.
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