Buying & Selling Currency Pairs
By Contributing Author
Forex trading is trading in currency pairs, that is, the buying of one currency while selling another, although no physical exchange of money takes place at any time. The strength of a currency goes up and down and as the currency strength fluctuates, so does the exchange rate of a currency pair. Traders aim to make a profit by betting on whether the currency will appreciate or depreciate against another currency. When a currency pair is listed, the first currency is known as the base currency, while the second currency is referred to as the quote currency. When you buy a currency pair, you are buying the base currency while selling the quote currency and when you sell a currency pair, you are selling the base currency at the same time as buying the quote currency. It is important to do your research before you begin trading in currency pairs as there are many factors that may impact the success of your trade.
Major Currency Pairs
There are seven major currency pairs – pairs that include the US dollars (USD). These are the most widely traded and frequently traded pairs in the world. They include EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD and NZD/USD. The major currency pairs have very liquid markets and they trade 24/5 – ie all hours of every business day. These have very narrow spreads.
Cross-currency pairs are currency pairs that do not contain the USD. There are major cross-currency pairs or crosses and these are known as minor currency pairs or minors. The most active minors involve the EUR, JPY and GBP. These are also very liquid markets, although not as liquid as the major currency pairs market and they have slightly wider spreads than the majors.
Exotic Currency Pairs
Exotic currency pairs are currency pairs that include one major currency paired with the currency of an emerging country, for example Hungary, Thailand, Mexico, South Africa or Brazil. These are less frequently traded so the market is not as liquid as the major or minors and the spreads are significantly wider.