The currency trading market, Forex, is considered the most liquid market in terms of trading volume. Trading in this market is carried out using a rule called trading currency pairs, where the trader simultaneously buys one currency and sells another.
Although this market ranks first in the world in terms of liquidity, there is some disparity in trading characteristics between the different categories of currency pairs. During the following lines, we highlight the most important categories of currency pairs and the most prominent differences.
About pairs trading
Currencies are traded in the Forex market in pairs trading. For example, when a trader wants to buy the US dollar (USD), in this case he needs to sell another currency, let it be the Japanese yen (JPY), and the symbol of the currency pair is then USD/JPY, where the currency you want to buy is called the “base currency.” The other currency is the secondary currency.
Categories of currency pairs
Although all currencies are traded in the same way, that is, on the basis of a currency pair, there are differences that distinguish some currency pairs from others, and these are the differences that led to the division of currency pairs in the Forex market into three categories, which are: Major currency pairs, cross currency pairs, and exotic currency pairs.
- Major currency pairs
The first section of currency pairs is the major currency pairs. This section includes 7 currency pairs, which are the currencies of the strongest global economies, with the exception of the Chinese yuan. These pairs are characterized by the following characteristics:
- The US dollar is one of the components of the pair, whether it is the base currency or the secondary currency.
- All currencies in these pairs enjoy strong and stable global demand due to the strength of their economy and the development of their financial markets, which creates a strong demand for them for import and investment purposes.
- The difference between the buying price and the selling price (spread) is lower than other pair categories.
- Its movements in the Forex market are more stable than in other categories. This can be seen through the prices screen Axia.
- It has strong liquidity and strong trading volume.
- The main currency pairs are (USD/JPY – GBP/USD – USD/CHF – AUD/USD – USD/CAD- EUR/USD – USD/NZD)
- Cross currency pairs
The second section is cross currency pairs. This section includes many currency pairs, but the main feature is that the US dollar is not a party to the pair. Among its most important properties are:
- The US dollar is not a party to the pair.
- They are lower in trading volume and liquidity than the major pairs.
- The spread is relatively higher than the spread in the major pairs.
- The Forex market is more volatile than the major pairs.
- Calculating profits is more complicated than the major pairs.
- Examples include (EUR/GBP – GBP/JPY – EYR/CHF).
- Exotic currency pairs
In exotic currency pairs the pair contains the US dollar against a currency other than the majors. The name “rare currency pairs” does not come from the fact that these currencies are not available in the Forex market, but the reason is that trading in these pairs is considered rare if we compare it to trading the major and cross pairs. Among its most important properties are:
- Its liquidity is lower than other currency pair categories and also the trading volume is lower.
- It is not easy to find a broker that offers trading of this type of currency pairs.
- It contains much more volatility risks than other categories because it contains the currencies of emerging and poor economies and is therefore more vulnerable to shocks and its movement is also vulnerable to government interventions in the exchange rate.
- It is not possible to get a broker that offers trading of many of them easily.
- You need a trader with great experience in the nature and conditions of those economies, and you also need... Trading strategies Complicated.
- Examples include USD/TRY, which is the US dollar against Turkish lira It is considered a clear example of the extent of the risks and volatility involved in this category of currency pairs, as can be seen through the Axia price screen.