Understanding Currency Pairs


In the Forex Market currencies are always traded in pairs. This is because when investors buy or sell one currency, they automatically sell or buy another. Which pairs to trade depends on your experience as a trader. When to buy or sell depends essentially on the exchange rate of each currency. In every currency pair, there is a base currency, the one on
left hand side, and a quote currency, the one on the right hand side. Note that we
always buy or sell the base currency For example EUR/USD=1.4500 means that the euro (EUR) is the base currency and the US Dollar
(USD) is the quote currency. In this example it means that 1 Euro can be
exchanged for 1.45 US Dollars. The most dominant currency pairs in the world are
called the Majors and they all include the US Dollar. They are the 7 most
traded Forex pairs globally and this is because of high mark liquidity, tight
spreads and low trading costs So as well as the EUR/USD for example. Another
example would be the GBP/USD the British Pound against the US Dollar. Non-USD pairs are called the Minors, or a cross currency pair.
They exhibit lower market liquidity and wider dealing spreads than the Majors.
However, they also offer the possibility for high probability trading
opportunities. Examples of Minors include EUR/GBP so the Euro against the British
Pound or GBP/JPY the British Pound versus the Japanese Yen. Exotic currency pairs include a major currency and the currency of a developing
economy such as Mexico or South Africa. Compared to majors and minors, most exotic pairs have lower liquidity, and can be extremely volatile and trading costs can be high. There are certainly opportunities for traders because of the
high price volatility but this comes with increased risk. Exotic pairs are for
traders with good knowledge and significant experience in the market.
Examples would include things like the Great British Pound against
the South African Rand or the USD against the Mexican Peso (USD/MXN)

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