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Monday, November 15, 2021

A Guide to Currency Pairs – What You Need to Know

The popularity of the forex market can be observed through its size, with this vast global marketplace worth an estimated $2.409 quadrillion in 2020.

However, this market is also highly liquid and incredibly volatile, while it’s unique in terms of how individual assets are traded in real-time. More specifically, international currencies are derivative assets that are traded in pairs, enabling investors to profit by speculating how the price of one will move in relation to another.

We’ll explore the different types of currency pairs below while offering some tips on how to trade these successfully.

Exploring Major Currency Pairs

While the wider forex market comprises approximately 170 different currencies, just seven pairs account for 68% of the sector’s total trading volumes.

These are referred to as major pairs, which pit seven different currencies (namely the pound sterling, the Japanese yen, the Swiss franc, the Australia dollar, the Canadian dollar, the New Zealand dollar, and the Euro) directly against the US dollar.

The greenback itself is on one side of 88% of all forex trades, while also helps to highlight the incredible popularity of major pairs.

One of the main benefits of trading major currency pairs is that they’re highly liquid, which makes it incredibly easy to buy and sell them in real-time. They’re also not particularly volatile, with pairs such as the USD/JPY considered to be a relatively safe haven asset that moves within a predictable range and is the subject of significant global news releases.

What About Minor and Exotic Pairs?

You can also trade minor currency pairs as an investor, which don’t include the US dollar but feature at least one of the world’s other seven major assets.

They may also be referred to as cross pairs, while the most widely traded assets within this grouping feature at least one of the Euro, pound sterling or yen. For example, the most widely traded minor pair is the EUR/GBP, which is highly liquid albeit marginally more volatile than the EUR/USD (with this trend having been exacerbated by the Brexit referendum).

At the other end of the spectrum are exotic currency pairs, which typically include a major currency (most commonly the USD) and the asset that represents a developing economy. 

The most popular exotic currencies are the South African rand (ZAR) and the Brazilian real (BRL). Currently, the most popular currency pairing is the USD/TRY, thanks largely to the volatility of the Turkish lira.

How to Trade Currency Pairs

At this stage, all that’s left is to offer some brief advice on how to trade the various currency pairs and decide which type of asset is right for you. These include:

  • Match Pairs to Suit Your Risk Profile

As each currency type has its own unique level of risk and liquidity, you’ll need to create a currency portfolio that matches this exactly.

  • Start Small and Scale Your Efforts Organically over Time

Whichever pairs you choose to trade, it’s important to start small (perhaps with just one or two relevant assets) before surmounting your efforts organically simultaneously with profitability and experience.

  • Use Leverage Wisely

Thanks to leverage, forex positions can be as much as 100-times larger than the value of your deposit. However, it’s important to manage this and use a reasonable amount of leverage as a trader, especially when investing in inherently volatile exotic pairs.

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Daniyel Carlson
Daniyel Carlson is a Young Researcher in the field of Data Science & Analytics having research experience of more than 8 years. He has a Masters in Computer Engineering and currently serves as an Editorial Assistant in IGI Global, United States of America. Daniyel also holds honorary positions in the Associate Member of Institute of Research Engineers and Doctors, International Association of Computer Science and Information Technology, International Association of Engineers, Society of Digital Information and Wireless Communications.

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