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Forex Trading: Buying and Selling Currency Pairs
What is Forex Trading?
Forex trading, also known as foreign exchange trading, is the simultaneous buying of one currency and selling of another. Currencies are traded through a “forex broker” or “CFD provider” and are traded in pairs. Currencies are quoted in relation to another currency, such as the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).
Buying and Selling in Currency Pairs
When you trade in the forex market, you buy or sell in currency pairs. Imagine each currency pair constantly in a “tug of war” with each currency on its own side of the rope. The exchange rate is the relative price of two currencies from two different countries, and it fluctuates based on which currency is stronger at the moment.
Categories of Currency Pairs
There are three main categories of currency pairs:
The “Majors”
The major currency pairs always include the U.S. dollar (USD). These are the most frequently traded pairs and provide more trading opportunities due to their higher liquidity.
The major currency pairs are:
– EUR/USD (euro dollar)
– USD/JPY (dollar yen)
– GBP/USD (pound dollar)
– USD/CHF (dollar swissy)
– USD/CAD (dollar loonie)
– AUD/USD (aussie dollar)
– NZD/USD (kiwi dollar)
The “Crosses”
Cross-currency pairs do not include the U.S. dollar (USD). Crosses that involve any of the major currencies are also known as “minors”.
The “Exotics”
Exotic currency pairs consist of one major currency and one currency from an emerging market (EM).
Liquidity in Forex
Liquidity in the forex market is based on the number of active traders buying and selling a specific currency pair and the volume being traded. The more frequently traded something is, the higher its liquidity. For example, the EUR/USD currency pair is more liquid than the AUD/USD pair because it is more frequently traded and at higher volumes.
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Major Cross-Currency Pairs (Minor Currency Pairs)
What are Cross-Currency Pairs?
Currency pairs that include any two of the major currencies except the U.S. dollar are known as cross-currency pairs or simply as the “crosses.” These are also referred to as “minor” currency pairs, as they are not as frequently traded as the major currency pairs.
Characteristics of Cross-Currency Pairs
While not as frequently traded as the major currency pairs, the crosses are still pretty liquid and provide plenty of trading opportunities. The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.
Euro Crosses
The euro (EUR) is one of the most commonly used currencies in cross-currency pairs. Some of the major euro crosses include:
– EUR/CHF (euro swissy)
– EUR/GBP (euro pound)
– EUR/CAD (euro loonie)
– EUR/AUD (euro aussie)
– EUR/NZD (euro kiwi)
– EUR/SEK (euro stockie)
– EUR/NOK (euro nockie)
These euro crosses provide trading opportunities, as they are still relatively liquid compared to other cross-currency pairs.
JPY and GBP Crosses
In addition to the euro crosses, there are also cross-currency pairs that involve the Japanese yen (JPY) and the British pound (GBP), such as:
– JPY/GBP (yen pound)
– GBP/CHF (pound swissy)
– GBP/CAD (pound loonie)
– GBP/AUD (pound aussie)
– GBP/NZD (pound kiwi)
These cross-currency pairs, while not as liquid as the majors, still offer trading opportunities for forex traders.
Remember, while the crosses may not be as actively traded as the major currency pairs, they can still provide valuable trading opportunities for those looking to diversify their forex portfolio.
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Other Cross-Currency Pairs (Minor Currency Pairs)
In addition to the euro, yen, and pound crosses, there are other cross-currency pairs that involve some of the other major non-USD currencies, such as the Australian dollar (AUD), Canadian dollar (CAD), and New Zealand dollar (NZD).
AUD Crosses
– AUD/CHF (aussie swissy)
– AUD/CAD (aussie loonie)
– AUD/NZD (aussie kiwi)
These AUD cross-currency pairs provide trading opportunities, as the Australian dollar is one of the more liquid non-USD currencies.
CAD and NZD Crosses
– CAD/CHF (loonie swissy)
– NZD/CHF (kiwi swissy)
– NZD/CAD (kiwi loonie)
The Canadian dollar and New Zealand dollar are also involved in some of the other actively traded cross-currency pairs.
While these crosses may not be as widely traded as the major currency pairs, they can still offer valuable diversification and trading opportunities for forex traders looking to expand their market exposure beyond the most commonly traded pairs.
As with all forex trading, it’s important to thoroughly research and understand the unique characteristics and trading dynamics of these cross-currency pairs before incorporating them into your trading strategies.
Exotic Currency Pairs
What are Exotic Currency Pairs?
Exotic currency pairs are made up of one major currency paired with the currency of an emerging or developing economy, such as Brazil, Mexico, Indonesia, Poland, Chile, Turkey, or Hungary. These pairs are not as heavily traded as the major or cross-currency pairs, so the transaction costs associated with trading them are usually higher.
Examples of Exotic Currency Pairs
Here are a few examples of exotic currency pairs:
– USD/TRY (United States / Turkey)
– USD/MXN (United States / Mexico)
– USD/ZAR (United States / South Africa)
– USD/HKD (United States / Hong Kong)
– USD/SEK (United States / Sweden)
– USD/PLN (United States / Poland)
– USD/HUF (United States / Hungary)
– USD/CZK (United States / Czech Republic)
– USD/DKK (United States / Denmark)
As you can see, these exotic pairs typically involve the U.S. dollar (USD) paired with the currency of an emerging or developing market.
Characteristics of Exotic Currency Pairs
Exotic currency pairs are generally less liquid and have wider bid-ask spreads compared to the major and cross-currency pairs. This means that the transaction costs associated with trading these pairs are usually higher.
However, exotic pairs can offer opportunities for diversification and potentially higher returns for traders willing to take on the additional risks. They may also be influenced by unique economic and political factors in the countries involved.
It’s important for traders to thoroughly research and understand the characteristics and trading dynamics of any exotic currency pairs they are considering before incorporating them into their trading strategies.