In the forex market, you deal with two currencies at a time. When you’re selling pound sterling, for example, you need to know what you’re selling it for. Let’s say you’re selling pounds and getting euros in return. In that case, you’re trading the GBP/EUR currency pair. In forex, you’ll be talking about currency pairs a lot.
There are three types of currency pairs: major, minor and exotic.
Major currency pairs
Major currency pairs consist of the most frequently traded currencies globally. Because they have massive liquidity, you’re able to trade them virtually always. Furthermore, you’ll find the lowest spreads – or brokerage costs – when trading these pairs.
Major currency pairs include:
|British pound/US dollar
|US dollar/Japanese yen
|US dollar/Swiss franc
|US dollar/Canadian dollar
|Australian dollar/US dollar
|New Zealand dollar/US dollar
Notice that every major currency pair has the US dollar on one side. This is because the dollar is the world’s leading reserve currency, and it’s involved in about 88% of currency trades.
Minor currency pairs
When a currency pair doesn’t include the US dollar, it’s called a minor currency pair or a cross-currency pair.
Here are a few minor currency pairs:
The most widely traded minor pairs consist of the pound sterling, euro or yen.
Exotic currency pairs
An exotic currency pair includes a major currency and the currency of a developing economy, such as Brazil or South Africa. You won’t find exotic pairs as often as you’ll find major or minor pairs, which means the spreads can be higher when trading them.
Exotic currency pairs include:
|British pound/South African rand
|Japanese yen/Norwegian krone
|New Zealand dollar/Singapore dollar
|US dollar/Hong Kong dollar
|Australian dollar/Mexican peso
Which pairs should I trade?
Picking the right currency pairs to trade depends on your experience as a forex trader. If you’re new to the game, it’s best to stick with the major and minor pairs – it’s easier to find trades and you’ll get lower spreads. Exotic pairs are more difficult to work with because they’re far less liquid and you’ll find higher spreads.
That said, it’s possible to make money with exotic pairs as long as you know what you’re doing. These pairs can be riskier, but they can pay off more significantly.
The more widely traded a currency is, the easier it will be to trade and the lower spreads you’ll find.
Frequently asked questions
Warning: Spread bets and CFDs are leveraged products and can result in losses that exceed deposits. The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Please ensure you fully understand the risks and take care to manage your exposure.