Foreign exchange currency pairs are the basis of forex trading, and the single thing against which traders engage for a profit. The unique nature of the forex markets means that trading in pairs is essential, so that traders can equally sell down as bid up the positions they trade. This introduces a degree of flexibility into the foreign exchange trading set-up, which can be used to help make traders more effective operators, with the capacity to profit on both sides of the market. However, not every currency pair has an equal weight and an equal ability to turn a profit, and traders need to be live to this issue when determining the most effective way to proceed with their trading.
There are broadly three different classifications of currency pair that foreign exchange traders will commonly choose to trade. But what are each of these classifications, and what are their merits and advantages as far as knowing which is best to trade is concerned?
Foreign Exchange Majors Pairs
The most commonly traded batch of currencies are known as the major pairs. These are the pairs that see more trading volume than the other markets, and as such provide traders with a greater diversity of opportunity for profiting from market movements. Major pairs are denominated in USD, and as such experience higher trading volumes than other currencies relative to them. This means that there are more traders participating in these markets, allowing for more stable trading conditions and the ability to more quickly enter and exit the markets you trade. This heightened liquidity and more predictable market make-up makes it more favourable for traders to engage in these types of positions. For this reason, those new to foreign exchange are recommended to stick close to the major pairs until they become more established and refine their expertise.
Foreign Exchange Cross Pairs
The next most commonly traded basket of currencies is known as the minor, or cross pairs. These are the currency pairs that are not denominated in USD, but that still benefit from significant trading volumes. These include currencies like the EUR and GBP, and of course other pairings of the AUD. These currency pairs are often much less heavily traded than their more major counterparts, yet they still provide opportunities for traders. Indeed, many Aussie traders will prefer to deal in AUD pairs, regardless of whether they are major or cross, in order to leverage their geography-specific advantages in these markets. Cross pairs are often reserved for more experienced traders, but beginners can also gain ground through structuring their trading in a more effective way.
Foreign Exchange Exotic Pairs
The remaining pairs are known as the exotics. As a general rule, you should only trade an exotic pair if you have particular cause to do so. Opportunities exist in other markets that are far easier to take advantage of, and as such, traders should take care to avoid these markets unless they are certain it will be effective for their trading needs. Nevertheless, there are ample alternatives that are more liquid, more stable and therefore more suitable for new and developing forex traders.