When trading forex, or foreign exchange, you're effectively dealing with currency pairs. For the new trader or the investor seeking to diversify, understanding the nature and function of currency pairs can be a bit overwhelming. In this article, we will delve into the differences between major, minor, and exotic currencies and how they fit into the world of forex trading.
A currency pair is the quotation of two different currencies, where the value of one is quoted against the other. The currency that is used as a reference is called the 'base currency', while the currency compared with the base is named the 'quote currency'.
Major currency pairs are the most traded in the forex market, representing nearly 85% of all forex trades. These pairs include the most powerful economies and are traded in high volumes. They include:
One key characteristic of major currency pairs is their low spreads. Because they trade in such high volumes, the spread between the buy and sell price (bid and ask price) is usually smaller than other categories.
Minor currency pairs, often referred to as 'cross currency pairs' or simply 'crosses', are pairs that do not include the U.S. Dollar. These pairs represent developed countries with strong economies. Notable examples of minor currency pairs include:
Minor pairs are not traded as heavily as major pairs, and thus, they may have a slightly higher spread and could be less liquid.
Exotic currency pairs are the least traded in the forex market and typically include a major currency alongside the currency of a developing economy. Examples of exotic currency pairs include:
Exotic pairs are less liquid than both major and minor pairs and have significantly larger spreads. They can be challenging to trade due to their increased volatility.
Advancements in technology have streamlined forex trading and made it accessible to everyday investors. Understanding the nuances of major, minor, and exotic currency pairs can be helpful for both beginner and experienced traders alike.
Like any investment, forex trading involves risk. Before diving into the world of forex, ensure you understand the market fundamentals and your risk tolerance. Happy Trading!