Forex trading involves buying and selling one currency against another in an attempt to profit from changes in the exchange rate. This is known as trading a currency pair. When trading forex, pairs are typically divided into major, minor and exotic currencies. Each type of currency pair has a different range of movement which is determined by a variety of factors. This article will explore what currency pairs are, the different types and the factors that influence their ranges. If you’re looking for an easy and convenient way to start trading, you may want to consider opening an Instant Funded Account, which allows you to start trading with minimal hassle and delay.
What Are Forex Pairs?
Forex pairs, also known as currency pairs, are combinations of two different currencies that are traded in the foreign exchange market. They are the foundation of forex trading as they allow investors to speculate on the relative values of different currencies. With the first currency serving as the base currency and the second serving as the counter or quotation currency, forex pairings are always quoted in ‘pairs’.
The most commonly traded forex pairs are the major currency pairs, which include the EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD. These pairs are considered to be the most liquid, are often the most widely traded and generally have the tightest spreads.
Other popular currency pairs include exotic pairs, which include currencies from emerging markets such as the Brazilian Real, the Turkish Lira and the South African Rand. These are less liquid and often have wider spreads, but can offer traders the opportunity to take advantage of price movements in emerging markets.
Cross currency pairs, also known as minor currency pairs, involve a combination of two currencies that do not include the US Dollar. These are less liquid than major currency pairs and often have wider spreads.
In the forex market, each currency pair is given a unique three-letter abbreviation. For example, the EUR/USD is abbreviated as “EUR/USD” and the GBP/USD is abbreviated as “GBP/USD”.
When trading forex pairs, investors can either go long or short. Going long means buying a currency pair in the expectation that the value of the base currency will increase relative to the counter currency. Going short means selling a currency pair in the expectation that the value of the base currency will decrease relative to the counter currency.
Traders can also use leverage when trading forex pairs. Leverage is the use of borrowed capital, usually from a broker, to increase the potential return of an investment. Leverage has the potential to magnify both gains and losses, making it a double-edged sword.
Forex pairs are combinations of two different currencies that are traded in the foreign exchange market. The most popular currency pairs include the major currency pairs, exotic pairs and cross currency pairs. When trading forex pairs, investors can either go long or short and can also use leverage to increase their potential return.
Major Currency Pairs
Major currency pairs are the most liquid and widely traded pairs in the forex market. They are typically made up of the US dollar and one of the following currencies: euro, British pound, Japanese yen, Swiss franc, Canadian dollar, and Australian dollar. These pairs account for the majority of forex trades and typically have the tightest spreads.
Minor Currency Pairs
Minor currency pairs are also known as cross currency pairs and involve trading one major currency against another. These pairs are usually less liquid than the major currency pairs and typically have wider spreads. Some examples of minor currency pairs include the EUR/GBP, GBP/JPY and USD/CHF.
Exotic Currency Pairs
Exotic currency pairs involve trading one currency from a major economy against another from a smaller or emerging economy. These pairs are usually less liquid than the major and minor pairs and often have high spreads. Examples of exotic currency pairs include the USD/MXN, EUR/TRY and GBP/ZAR.
Factors That Influence Currency Pair Ranges
There are a number of factors that can influence the range of a currency pair. These include volatility, currency strength, interest rate differentials, politics, and technical analysis.
How much a currency pair changes over a specific time period is measured by its volatility. Volatile currency pairs tend to have wider ranges than less volatile pairs, as they are more prone to large price movements.
The strength of a currency is determined by its demand in the forex market. Currencies that are in high demand tend to have a wider range than those that are in low demand.
Interest Rate Differentials
Differences in interest rates between two nations are referred to as interest rate differentials. When the interest rate in one country is higher than in the other, traders tend to buy the currency with the higher interest rate in order to benefit from the higher returns. This can lead to an increase in the range of the currency pair.
Political events such as elections, referendums, and changes in government can have a significant impact on the range of a currency pair. These events can lead to large and sudden price movements, which can cause the range to widen.
Technical analysis is the study of past price movements in order to identify trends and make predictions about future price movements. Technical analysis can be used to identify support and resistance levels and identify entry and exit points for trades.
Forex pairs are divided into major, minor and exotic currencies. Each type of currency pair has a different range of movement which is determined by a variety of factors. These include volatility, currency strength, interest rate differentials, politics, and technical analysis. By understanding these factors and how they influence the range of a currency pair, traders can gain an advantage in the forex market.