The foreign exchange market, commonly referred to as forex, is the largest and most liquid financial market in the world. It is where the buying and selling of currencies take place, and it operates 24 hours a day, five days a week. Forex is an attractive market for traders and investors because of its high liquidity and volatility, which can provide substantial profit opportunities.
To trade forex, traders need to understand the currency pairs available in the market. A currency pair is the quotation of two currencies, with the value of one currency being expressed in terms of the other currency. There are three types of currency pairs: majors, crosses, and exotics.
Majors are the most traded currency pairs in the forex market. They consist of the US dollar (USD) and the currency of a developed country, such as the euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD). These pairs are highly liquid and have tight bid-ask spreads, which means that traders can easily buy and sell them at any time without significant slippage.
The EUR/USD is the most traded currency pair in the forex market, accounting for around 30% of all forex transactions. The USD/JPY, GBP/USD, AUD/USD, and USD/CHF are also popular majors. The majors are the most suitable for beginners to start trading as they are less volatile and have lower spreads.
Crosses, also known as minor currency pairs or simply minors, are currency pairs that do not include the US dollar. They are made up of two major currencies, such as the euro and the Japanese yen (EUR/JPY) or the British pound and the Swiss franc (GBP/CHF). Crosses are less liquid than majors, which means that their bid-ask spreads are wider.
The most traded crosses include the EUR/JPY, GBP/JPY, EUR/GBP, and CHF/JPY. Crosses are more volatile than majors, which can provide traders with greater profit opportunities, but also increase the risk of losses. As such, they are more suitable for experienced traders who can handle the price fluctuations and the wider spreads.
Exotic currency pairs are currency pairs that include one major currency and one currency of a developing country, such as the South African rand (ZAR), Mexican peso (MXN), or Turkish lira (TRY). Exotics are the least traded currency pairs in the forex market and have wider spreads and higher volatility.
Trading exotics requires a deep understanding of the economic and political situations in the developing countries involved, as well as their impact on the exchange rates. Exotics are more suitable for advanced traders who have a high risk tolerance and can handle the unpredictable price movements.
In conclusion, majors, crosses, and exotics are the three types of currency pairs available in the forex market. Majors are the most traded and liquid pairs, crosses are less liquid and more volatile, and exotics are the least traded and most volatile pairs. Traders need to understand the characteristics of each type of currency pair and choose the one that suits their trading style, risk tolerance, and investment objectives.