The foreign exchange (forex) market is the largest and most liquid financial market in the world, with over $5 trillion traded daily. When trading currencies, they are listed in pairs, such as EUR/USD (euro/US dollar). The first currency listed is called the base currency, while the second is called the quote or counter currency. There are three main types of currency pairs – major, minor and exotic pairs. This article will explain what these are and provide examples of each.
Major Currency Pairs
Major currency pairs are the most actively traded and liquid pairs in the forex market. They involve the currencies of the largest and most developed economies in the world. The four major pairs are:
- GBP/USD (British pound/U.S. dollar)
- EUR/USD (euro/U.S. dollar)
- USD/JPY (US dollar/Japanese yen)
- USD/CHF (US dollar/Swiss franc)
These four major pairs account for over 80% of total forex trading volume. The euro and US dollar are the most actively traded currencies, appearing in three out of the four major pairs. The US dollar is the preferred base currency in the forex market.
The major currency pairs tend to have the lowest spreads and most liquidity. This makes them ideal for forex beginners to start trading. Their exchange rates also tend to be stable relative to minor and exotic pairs. Overall, the majors are the easiest and most cost-efficient pairs to trade.
Some brokers may offer fixed spreads on major pairs, meaning the spread is guaranteed to be a certain number of pips. For example, a broker may offer a fixed 3 pip spread on the EUR/USD pair. This predictability helps traders better calculate potential profits and losses on a trade.
In addition to the traditional four majors, some brokers are now classifying other actively traded pairs as majors. These include pairs like AUD/USD (Australian dollar/U.S. dollar) and USD/CAD (US dollar/Canadian dollar). The designation of new major pairs reflects the growing stature of currencies like the Australian dollar in global forex markets.
Minor Currency Pairs
Minor currency pairs are less liquid and trade less volume compared to majors. They involve major currencies paired with currencies from smaller economies. Examples include:
- EUR/GBP (euro/British pound)
- EUR/CAD (euro/Canadian dollar)
- GBP/JPY (British pound/Japanese yen)
- AUD/USD (Australian dollar/US dollar)
- USD/MXN (US dollar/Mexican peso)
While minors are more volatile than majors, they still offer sufficient liquidity for most forex traders. Their spreads are typically wider than majors, making them more expensive to trade. Minors provide opportunities to diversify forex trading strategies beyond just the major pairs.
Some brokers will classify minor pairs as “cross currencies” because they don’t involve the US dollar. Common cross minors include EUR/CHF, EUR/GBP, and GBP/JPY. Trading the cross rates between major currencies provides unique trading opportunities aside from the US dollar.
Exotic Currency Pairs
Exotic currency pairs include a major currency paired with the currency of a small or emerging market economy. Examples include:
- EUR/TRY (euro/Turkish lira)
- USD/SEK (US dollar/Swedish krona)
- GBP/HKD (British pound/Hong Kong dollar)
- USD/DKK (US dollar/Danish krone)
- USD/ZAR (US dollar/South African rand)
Exotics are the least liquid and most volatile pairs. They have wider spreads and higher trading costs compared to majors and minors. Exotics can experience large price swings from economic or geopolitical instability in the emerging market they represent.
While riskier, exotics provide unique trading opportunities not found in major or minor pairs. They diversify exposure away from the US dollar and major economies. Overall, exotic pairs are best suited for experienced forex traders.
Choosing Currency Pairs
Here are some tips on choosing which currency pairs to trade:
- Beginners should start with major pairs for their liquidity and smaller spreads. The EUR/USD and USD/JPY are good options.
- Analyse your trading strategy – certain pairs may be better suited for range trading, trend following, or carry trades.
- Consider your risk tolerance – more volatility from exotics means higher potential rewards and risks.
- Trade pairs with strong liquidity to enter and exit positions easily. Check the average daily trading range.
- Focus on pairs that represent economies you understand and can analyse key events for.
- Watch for any upcoming elections, central bank policies, or economic data releases that could increase volatility.
It’s common to start off trading just one or two pairs with a broker offering very low spreads. As you gain experience, you can trade additional pairs and take advantage of more opportunities. Utilising major, minor, and exotic pairs provides diversity in your trading.
The forex market offers a world of potential trading opportunities through its major, minor, and exotic currency pairs. While majors are ideal for new forex traders, delving into minors and exotics provides unique trades and diversification. Carefully consider spreads, liquidity, volatility, and your personal trading style when choosing pairs. Understanding the differences between the three types of pairs puts you ahead of the game in forex trading. With knowledge of the currency pairs available, you can tailor your trading approach and maximise success.
