A thorough understanding of currency pairs is fundamental to navigate the intricate world of currency trading successfully. By comprehending the dynamics of currency pairs, traders can accurately analyse market trends, anticipate market movements, make informed trading decisions, and effectively execute strategies. Moreover, proficiency in currency pairs enables traders to capitalise on market fluctuations and mitigate …
A thorough understanding of currency pairs is fundamental to navigate the intricate world of currency trading successfully. By comprehending the dynamics of currency pairs, traders can accurately analyse market trends, anticipate market movements, make informed trading decisions, and effectively execute strategies. Moreover, proficiency in currency pairs enables traders to capitalise on market fluctuations and mitigate risks. This blog explains currency pairs and their types in detail so you can understand the dynamics of these pairs and trade profitably.
Currency pairs represent the relative value of two currencies, with one currency valued against the other. Each pair has one base currency, the first one in the pair, and a quote currency, the second one. In currency trading, a currency pair is treated as a single unit or instrument, where one currency is bought or sold against another to make a profit from market fluctuations.
The pair shows how much quote currency is needed to buy one unit of base currency. For example, if the exchange rate of the currency pair EUR/USD is 1.300, this means that 1 euro (base currency) is equal to 1.3000 US dollars (quoted currency/counter currency).
Currency pairs are divided into three categories on the basis of their trading volume and frequency:
The most traded or most liquid currency pairs are categorised as the major currency pairs. They include combinations of currencies from stable and economically dominant countries. The more trading volume and frequency a pair has, the more ‘major’ it is considered in the currency trading market. Major currency pairs include:
Among all the major currency pairs, the most actively traded is the first one on the list, EUR/USD. However, the last three pairs, AUD/USD, USD/CAD, and NZD/USD, are also known as commodity currencies because Australia, Canada, and New Zealand are all significant exporters of commodities; therefore, fluctuations in commodity prices affect their currency trading rates.
The fundamental factors that impact movement in the market rates of major currency pairs are:
The minor currency pairs are also known as cross pairs. Minor pairs are not as liquid as majors but have significant trading volume. They do not include the US dollar; instead, they consist of two major currencies or a major currency paired with the currency of a smaller economy, like:
With careful planning and preparation, you can get the most competitive currency exchange rates; you can enjoy your trip without worrying about currency-related issues.
A currency pair with one major currency and one from a developing or emerging market economy is exotic pair. These pairs are characterised by higher spreads, lower liquidity, and increased volatility compared to majors and minors. Exotic pairs offer higher returns but also higher potential risks; hence, they require deep understanding and careful risk management. Examples of exotic currency pairs are:
Before entering the currency trading world, it is essential to develop a comprehensive understanding of market dynamics, become familiar with currency pairs, anticipate market movements precisely, and leverage them to your advantage by making informed decisions.
Linea Global is a leading company in the UK that provides a range of reliable and secure solutions to ensure that your currency trading experience is smooth and hassle-free. We offer competitive rates and multiple trading options like spot trade, forwards, and market orders. In addition, our secure cross-border transactions allow you to make international payments in multiple currencies without any complicated process or delay.
