The Forex market, also known as the foreign exchange market, is the largest and most liquid financial market in the world. It is where currencies from different countries are bought and sold, allowing individuals, businesses, and institutions to exchange one currency for another. The Forex market operates 24 hours a day, five days a week, and trades around $6.6 trillion on average every day.
Understanding Currency Pairs
In the Forex market, currencies are always traded in pairs. A currency pair consists of two currencies, with the first currency being the base currency and the second currency being the quote currency. The value of a currency pair represents the amount of the quote currency needed to buy one unit of the base currency. For example, in the EUR/USD currency pair, the euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency.
Major, Minor, and Exotic Currency Pairs
In the Forex market, currency pairs are categorized into three main groups: major, minor, and exotic currency pairs.
Major currency pairs: These are the most heavily traded currency pairs and involve the world’s largest economies. The major currency pairs include:
- EUR/USD (Euro/US dollar)
- GBP/USD (British pound/US dollar)
- USD/JPY (US dollar/Japanese yen)
- USD/CHF (US dollar/Swiss franc)
- AUD/USD (Australian dollar/US dollar)
- USD/CAD (US dollar/Canadian dollar)
Minor currency pairs: Also known as cross currency pairs, minor currency pairs do not include the US dollar. The most commonly traded minor currency pairs include:
- EUR/GBP (Euro/British pound)
- EUR/JPY (Euro/Japanese yen)
- AUD/JPY (Australian dollar/Japanese yen)
- GBP/JPY (British pound/Japanese yen)
Exotic currency pairs: Exotic currency pairs involve one major currency and one currency from a developing or smaller economy. These currency pairs are less liquid and often have wider spreads. Some examples of exotic currency pairs are:
- USD/MXN (US dollar/Mexican peso)
- USD/ZAR (US dollar/South African rand)
- EUR/TRY (Euro/Turkish lira)
- GBP/CNH (British pound/Chinese yuan)
It’s essential for beginner Forex traders to familiarize themselves with the different currency pairs and their characteristics. Understanding the basics of the Forex market and currency pairs is the first step towards becoming a successful trader.