The foreign exchange market is currently the largest financial market in the world with approximately $6.6 trillion daily turnovers in 2019. The forex market is a global decentralized marketplace where currencies are bought and sold against each other by investors and traders, 24 hours a day, 5 days a week. This exchange of currencies is called foreign exchange trading or simply forex trading.
What actually happens is that prices of different currencies of the world keep changing in relation to one another so there are always some currencies that hold power over another. Taking advantage of this difference in prices, traders buy and sell the currencies to earn a profit. There are various factors that depend on a currency’s price so that is why the forex market stays unpredictable and ever-changing.
Now these exchanges happen in currency pairs, which means that a trader buys or sells the currency he already has in exchange for another currency, this makes those two currencies in a pair, for example, EUR/USD. In the forex market, there are multiple currencies from all around the world that can be traded. Three commonly known categories of currency pairs are as follows:
Major Pairs– These pairs are the widely traded most liquid currency pairs, which means that there are more buyers and sellers present in the forex market for these currency pairs as compared to other pairs. This makes them profitable to traders because forex brokers offer minimum spreads for these, have low to none commission cost to open a trade, trade can be done faster and have the most information, news, updates, analysis easily available. An interesting fact about these currency pairs is that all other major currencies are always traded against USD (US Dollars).
Here is a list of most traded currency pairs with the percentage with which they were traded in 2020, which makes almost 75% of forex trade:
- EUR/USD (Euro and US dollar) – 27.95%
- USD/JPY (US dollar and Japanese yen) – 13.34%
- GBP/USD (British pound sterling and US dollar) – 11.27%
- AUD/USD (Australian dollar and US dollar) – 6.37%
- USD/CAD (US dollar and Canadian dollar) – 5.22%
- USD/CHF (US dollar and Swiss franc) – 4.63%
- NZD/USD (New Zealand dollar and US dollar) – 4.08%
Minor/Crosses Pairs– These pairs are also very actively traded and offer good trading opportunities. They are made up of one of the major currencies listed above but do not include USD. Most of the pairs involve EUR, JPY, and GBP. For example, after major currency pairs these were the most traded pairs: EUR/JPY, GBP/JPY, EUR/GBP, AUD/JPY, and EUR/AUD.
Exotic Pairs– These pairs are made up of one major currency and the other currency is from an emerging market (EM), meaning countries that have a rising economy. It depends on the choice of your forex broker if they offer these pairs on their platform or not. They are usually not traded that popularly as compared to the other two so their transaction cost is higher. Here are some examples, USD/BRL, USD/HKD, USD/SAR, USD/SGD.
There are multiple currency pairs traded in the forex market, the United Nations recognizes 180 currencies so far from all around the world. It is very important for forex traders to know which currency pair to choose, you can take help from your forex broker in this regard as well.