Currently, there are an estimated 170 international currencies in play in the global forex market, with these entities traded in variable pairs that are split into three distinct categories.
More specifically, there are major, minor and exotic currency pairs, each of which differ significantly in their nature and offer various benefits and potential pitfalls to traders.
In this post, we’ll break down the different types of currency pair, while asking what defines and distinguishes them from each other.
We’ll start with the so-called “major pairs”, which include the dominant US dollar (USD) and seven other major currencies.
Within this category, the greenback is paired with each of the seven other major currencies, with these pairings comprising 68% of the total trading volume in the forex market.
The most popular pairing in this space is the EUR/USD, which accounts for more than 20% of daily trading volumes and refletts the two largest single economies in the world. The GBP/USD and JPY/USD are also popular and dominant major pairings, which shape the activity of traders on a daily basis.
In this respect, both the USD and GBP are a great way to begin your journey in forex trading, particularly in terms of achieving excellent liquidity and minimising volatility in the marketplace.
Next up is minor currency pairs, which describe various combinations of seven major currencies excluding the USD.
These pairs are certainly less frequently traded than major assets, which makes perfect sense when you consider the prevalence of the greenback and its dominant role in the market and as the world’s largest foreign exchange reserve currency.
However, minor examples such as the EUR/GBP and GBP/JPY offer incredible levels of liquidity to traders, while these entities are also naturally stable and follow relatively predictable price trends.
They also trade within relatively narrow price ranges, helping investors to potentially minimise their losses over time.
We close with exotic or cross pairings, which include one of the seven major currencies paired with one from a developing or emerging economy.
Typically, the most popular exotic pairs include the USD, which helps to minimise the increased volatility in this market niche. However, it doesn’t necessarily help to curb the inflated cost of trading exotic pairs, which is a major issue for investors in the marketplace.
The most popular exotic pairs include USD/TRY, with the Turkish Lira having enjoyed sustained growth in the marketplace of late.
These pairs aren’t commonly traded due to their high levels of price volatility, making them most suitable for experienced investors with a healthy appetite for risk.