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Buying And Selling Currency Pairs
Currencies are traded through entities known as "forex brokers" or "CFD providers," and they are always traded in pairs. These pairs are quoted in relation to each other.
For instance, a popular currency pair is the euro against the U.S. dollar (EUR/USD) or the British pound against the Japanese yen (GBP/JPY).
In the forex market, every trade involves dealing with currency pairs.
You can visualize each currency pair engaged in a constant "tug of war," with each currency on opposite sides of the rope.
An exchange rate represents the relative value of two currencies from different countries.
The exchange rates are dynamic and fluctuate based on the strength of each currency at any given moment.
Currency pairs can be categorized into three groups:
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The "majors," which always include the U.S. dollar.
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The "crosses," which exclude the U.S. dollar. Crosses involving any of the major currencies are also referred to as "minors."
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The "exotics," which consist of one major currency paired with a currency from an emerging market (EM).
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Major Currency Pairs
The currency pairs listed below are considered the “majors.”
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These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. While there are EIGHT major currencies, there are only SEVEN major currency pairs. Compared to the crosses and exotics, the price moves more frequently with the majors, which provides more trading opportunities.
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The majors are the most liquid in the world.
Liquidity is used to describe the level of activity in the financial market.
In forex, it’s based on the number of active traders buying and selling a specific currency pair and the volume being traded.
The more frequently traded something is the higher its liquidity.
For example, more people trade the EUR/USD currency pair and at higher volumes than the AUD/USD currency pair.
This means that EUR/USD is more liquid than AUD/USD.
Major Cross-Currency Pairs or Minor Currency Pairs
Currency pairs that include any two of the major currencies except the U.S. dollar are known as cross-currency pairs or simply as the “crosses.” Major crosses are also known as “minors.” While not as frequently traded as the majors, the crosses are still pretty liquid and still provide plenty of trading opportunities. Don’t confuse minor currency pairs with the seven major currency pairs, all of which include the U. S. dollar against one of the seven other most liquid currencies in the world.
The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.
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Euro Crosses
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Yen Crosses
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Pound Crosses
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Other Crosses
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Exotic Currency Pairs
Exotic currency pairs are not related to exotic belly dancers, nor are they twins. Instead, they involve currencies from countries
with developing or emerging markets.
These pairs are combinations of one major currency and the currency of an emerging economy, such as Brazil, Mexico, Chile, Turkey, or Hungary.
In essence, an exotic currency pair consists of one major currency paired with an exotic currency.
Below, you'll find a chart with a few examples of exotic currency pairs. Can you take a guess at what the other currency symbols represent?
Keep in mind that these exotic pairs are not as actively traded as the "majors" or "crosses," which means that the transaction costs associated with trading them are typically higher.
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When trading exotic currency pairs, it's not uncommon to encounter spreads that are two or three times larger than those of more commonly traded pairs like EUR/USD or USD/JPY.
Because of the relatively lower liquidity in the exotic currency pairs, they tend to be much more responsive to economic and geopolitical events.
For instance, a political scandal or unexpected election results can lead to significant and abrupt fluctuations in the exchange rate of an exotic pair.
If you're considering trading exotic currency pairs, it's essential to take this increased sensitivity into account when making your decisions.
For those of you who are particularly intrigued by exotic pairs, here's a more comprehensive list of them.
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Aside from the three main categories of currency pairs, there are other “groups” of currencies that are thrown around in the FX world that you should be aware of.
G10 Currencies
The G10 currencies are ten of the most heavily traded currencies in the world, which are also ten of the world’s most liquid currencies.
Traders regularly buy and sell them in an open market with minimal impact on their own international exchange rates.
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Summary
Ian gon lie, that was a lot of information on currencies but you just raised your FX IQ points!
Let’s summarize what you’ve learned in a series of questions:
What is a currency pair in forex?
A currency pair is a pairing of currencies where the value of one is relative to the other. For example, GBP/USD is the value of the British pound relative to the U.S. dollar.
What are the major currency pairs?
Major currency pairs (“majors”) are those that include the U.S. dollar and are the most frequently traded. There are seven of them: EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD, and NZD/USD.
What are the currency crosses?
Currency crosses (“crosses”) are the more frequently traded currencies that do NOT include the U.S. dollar in their pairing. Crosses include EUR/GBP, EUR/CAD, GBP/JPY, EUR/CHF, EUR/JPY, etc.
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. If you were to pair each currency up with another, it’s a lot. You should only master the main one. Even only one would be more than enough.2
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