Forex trading is the simultaneous purchase of one currency and sale of another. Forex trading is done in pairs and is done through an intermediate broker or dealer.
The euro and the US dollar (EUR/USD), for example, or the British pound and the Japanese yen (GBP/JPY). You purchase or sell currency pairs when you trade in the forex market.
Exchange rates alter depending on which currency is stronger at the time.
Currency pairs are classified into three types:
The US dollar is not included in cross-currency pairs. Crosses involving any of the major currencies are also referred to as “minors.”
Exotic currency pairs include one major currency and one developing market currency (EM).
Minor Currency Pairs
Cross currency pairs or minor currencies are currency pairs that are not matched with the US dollar.
Crosses from three non-USD currencies are actively traded: EUR, JPY, and GBP.
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Exotic currencies are those of countries with developing or growing economies. An exotic currency pair is one major currency paired with the currency of a developing country, such as Brazil, Mexico, Chile, Turkey, or Hungary.
Some instances of exotic currency combinations can be found in the sections below. Remember that because these pairs are not as heavily traded as “major currencies” or “minor currencies,” the transaction fees associated with trading them are usually greater.
Spreads that are two or three times bigger than EUR/USD or USD/JPY are not uncommon. Exotic currency pairs are substantially more vulnerable to economic and geopolitical events due to their overall lower level of liquidity.
A political crisis, for example, or an unexpected election outcome, can cause the exchange rate of an exotic pair to move violently. So, if you wish to trade exotic currency pairs, keep this in mind when making your decision.
Let’s review what you’ve learned with a series of questions:
What are forex currency pairs?
A currency pair is a pair of currencies in which the value of one currency is relative to the value of another. GBP/USD, for example, represents the value of the British pound in relation to the US dollar.
What are the most important currency pairs?
The most often traded currency pairs (“Major Currency”) are those that involve the US dollar. EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD, and NZD/USD are the seven.
What exactly are currency crosses?
Currency crosses (“Crosses”) are pairs of currencies that do not include the US dollar. EUR/GBP, EUR/CAD, GBP/JPY, EUR/CHF, EUR/JPY, and other crosses are available.
How many currency pairs exist?
Hundreds of currency pairs are available, but not all of them can be exchanged on the FX market. Currently, the United Nations recognizes 180 currencies.
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