What Are The Main Types Of Currency Pairs

The main types of currency pairs

The foreign exchange (Forex) market is a dynamic arena where traders engage in the buying and selling of currencies. The foundation of Forex trading lies in currency pairs, where the value of one currency is measured against another. Understanding the different types of currency pairs is fundamental for any trader navigating this complex market.

There are three main types of currency pairs: majors, crosses, and exotics.

Major currency pairs

Major currency pairs are the most liquid currency pairs, meaning that they are traded with the largest volume. They also have the tightest spreads, meaning that the difference between the bid and ask price is minimal. The seven major currency pairs are:

• EUR/USD (Euro/US dollar)

• USD/JPY (US dollar/Japanese yen)

• GBP/USD (British pound/US dollar)

• USD/CHF (US dollar/Swiss franc)

• AUD/USD (Australian dollar/US dollar)

• USD/CAD (US dollar/Canadian dollar)

• NZD/USD (New Zealand dollar/US dollar)

Cross currency pairs

Cross currency pairs are those that do not include the US dollar. They are typically less liquid than the major currency pairs, and they have wider spreads. Some examples of cross currency pairs include:

• EUR/GBP (Euro/British pound)

• AUD/JPY (Australian dollar/Japanese yen)

• EUR/CHF (Euro/Swiss franc)

• GBP/CHF (British pound/Swiss franc)

• AUD/NZD (Australian dollar/New Zealand dollar)

Exotic currency pairs

are those that are traded against the US dollar, but they are not as liquid as the major currency pairs. They have wider spreads than the major currency pairs, and they are more volatile. Some examples of exotic currency pairs include:

• USD/MXN (US dollar/Mexican peso)

• USD/TRY (US dollar/Turkish lira)

• USD/ZAR (US dollar/South African rand)

• USD/RUB (US dollar/Russian ruble)

• USD/INR (US dollar/Indian rupee)

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How to choose a type of currency pair

The choice of currency pair type depends on several factors, including your trading goals, level of experience, and risk appetite.

If you are a beginner trader, you should start with majors. They have high liquidity and tight spreads, making them easier to trade.

If you want to diversify your portfolio or gain exposure to emerging markets, you can consider crosses or exotics. However, it is important to understand that these types of currency pairs can be more risky than majors.

In addition to the three main types of currency pairs, there are a few other factors to consider when choosing a currency pair to trade. These include:

• Correlation. Currency pairs can be correlated, meaning that their prices move in similar directions. This can be a good or bad thing, depending on your trading strategy.

• Volatility. Currency pairs can be volatile, meaning that their prices can fluctuate wildly. This can be a good thing for traders who are looking to make quick profits, but it can also be risky.

• Economic factors. Economic factors, such as interest rates, inflation, and GDP growth, can affect the value of currencies. It is important to understand these factors when making trading decisions.

By considering these factors, you can make an informed decision about the type of currency pair that is right for you. If you are wondering what are the cheapest Forex pairs to trade, read the Traders Union article.

Strategy options for different types of currency pairs

• 1

  Majors

  Majors are the most liquid currency pairs, so they are suitable for a wide range of trading strategies. Some of the most popular strategies for the Majors include:

  • Trend trading. This strategy is based on the fact that prices move in a specific direction, called a trend. Traders using trend trading try to determine the direction of the trend and open a position according to it.

  • Volatility trading. This strategy is based on the fact that the prices of currency pairs are more volatile during certain periods of time. Volatility traders try to identify these time periods and open a position according to them.

  • Scalping. This strategy is based on opening and closing positions within a short period of time, usually a few minutes or hours. Scalpers try to make a small profit on each trade by opening a large number of trades.

• 2

  Crosses

  Crosses are less liquid than majors, so they are suitable for more conservative trading strategies. Some of the most popular strategies for crosses include:

  • Day trading. This strategy is based on opening and closing positions within one trading day. Day traders use technical indicators to analyze prices and make trading decisions.

  • Trend Trading. This strategy is also suitable for crosses, but it requires more careful analysis than for majors. Crosses often move in the direction of a trend, but they can also be more volatile, making it difficult to determine the direction of the trend.

• 3

  Exotics

  Exotic currency pairs are the most risky, so they are suitable for experienced traders who are willing to take increased risk. Some of the most popular strategies for exotics include:

  • Scalping. Scalping is the most popular strategy for exotics. This is because exotic currency pairs often have high volatility, allowing traders to make small profits on each trade.

  • Day Trading. Day trading can also be effective for exotics. However, traders should exercise caution as exotic currency pairs can be more volatile than majors or crosses.

Ultimately, the choice of trading strategy depends on the trader's individual goals, experience and risk appetite.