A currency pair is a comparison of two different currencies, where the value of one is expressed in terms of the other. The first listed currency in a pair is called the base currency. Its relative value against another (the quote)currency shows how much it costs to purchase one unit of that base currency.
Currencies are identified by their ISO codes – usually, three letters representing them on international markets – so, for example, USD stands for US Dollar. By comparing these two currencies, we can determine how much purchasing power each has when traded with the other.
The UN recognizes 180 world currencies as legal tender. The foreign exchange market (Forex) has a daily turnover of at least $5 trillion. Forex is a major source of revenue and speculation for central banks, institutions, and investors. It is crucial to understand various types of currency pair and their market movement to become a better trader.
Watching forex video can be useful for learning about different trading strategies, market analysis, and risk management techniques concerning currencies.
What Is a Major Currency Pair?
The major currency pairs highly traded on the forex market are generally characterized by their high liquidity, low risks, and low spreads.
There are six major currency pairs GBP/USD, EUR/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, and NZD/USD. One thing they have in common is that they are all paired with the US dollar.
AUD/USD and USD/CAD are also called commodity currencies, as Australia and Canada thrive on these assets.
Benefits and Demerits of Major Currency Pairs
Let us sum up some of the major advantages of major currency pairs:
- Volume. The high trading volume of major currency pairs makes it easier to trade them without worrying about liquidity issues.
- Spreads. You can get the best spreads in major currency pairs. This translates to lower transaction costs for traders.
- Stability. They are more stable and less prone to fluctuations than the minor pairs. A lack of unpredictable moves makes it easier for traders to analyze them.
- Analysis. A ton of information is available online regarding them, as most traders choose major currencies as their go-through trading partners.
- Flexibility. There are a total of 6 major currency pairs. They are traded across multiple time zones. Traders can choose to trade them at any time that suits them.
Some of the disadvantages are:
- Volatility. The high stability and liquidity can make major currency pairs less volatile. As volatility is the bread and butter for traders, this could mean fewer trading opportunities.
- Diversification. You cannot expose your portfolio to other currencies if you are bent on trading majors. Diversifying your assets is essential to minimize risks.
What Is a Minor Currency Pair?
Examples of minor currency pairs include EUR/GBP, EUR/AUD, GBP/JPY, CHF/JPY, NZD/JPY, and GBP/CAD. These pairs are less commonly traded than major currency pairs and do not include the US dollar.
Trading in minor currency pairs can carry higher risk as they have low liquidity and wider spreads.
Benefits and Demerits of Minor Currency Pairs
Minor currency pairs come with their own perks. Let us overview them in detail:
- Higher potential returns Due to their higher volatility, trading minor currency pairs can offer higher returns than major currency pairs.
- Diversification. Trading minor currency pairs provide diversification opportunities, which can reduce portfolio risk.
- More opportunities. Minor currency pairs provide more opportunities for traders to find unique trading ideas that may not be present in major currency pairs.
While the disadvantages are:
- Higher Spreads. The spread (the difference between the bid and ask price) for minor currency pairs can be higher due to the lower liquidity. This leads to higher transaction costs.
- Higher Volatility. Minor currency pairs can be more volatile. Even small economic news changes can lead to significant price movements as the volume is low.
- Analysis. Because of their lower trading volume, minor currency pairs may not follow established technical analysis patterns as closely as major pairs. This can make it difficult to predict their movements.
Which One Should You Choose, Major or Minor Currency Pairs?
There is no clear-cut answer to the question. If you prefer stable, higher liquidity, and lower spreads, then major currency pairs would be the answer.
On the other hand, minor currency pairs are riskier due to their lower liquidity. Still, they also offer higher potential returns and diversification opportunities.
Choosing between major and minor currency pairs ultimately depends on individual trading strategies, risk tolerance, and market analysis.
Are There Any Other Currency Pairs?
Exotic currency pairs combine one of the 8 major currencies and a currency from a developing or emerging economy. They offer a chance to diversify trading and have higher volatility and interest rates. They can also feature an exotic against an exotic, such as NOK/TRY or TRY/RUB.
Exotic currency pairs have the highest spreads and are less liquid than major or minor currency pairs.
