FOREX TRADING FOR BEGINNERS: GET TO KNOW YOUR CURRENCY PAIRS

For most of us, when we think of currency exchange, it is a question of getting some holiday money. You may shop around for the best deals, hitting the Post Office or using your Nectar Card in Sainsbury’s. And as everyone knows, you don’t get your currency at the airport, unless you want to get a terrible rate. Of course, foreign exchange is more than just holiday money. In fact, it represents the largest and most liquid financial market in the world. Stock market traders measure their daily volumes in billions. Forex traders measure it in trillions, quadrillions annually. Forex stands for foreign exchange, and thus forex traders are those who trade currencies. But what are they actually trading? It’s a key question for those looking to get into financial trading. What they are trading is forex pairs, i.e., the value of one currency against another. It is a global marketplace, so those logging on to the market in the UK will be connecting with people on forex trading Australia, France, the US, Canada platforms, and beyond. There are, of course, many ways to trade forex pairs, but beginners must start with the basics, and that means understanding the types of pairs. There are three main categories: Majors, Minors, and Exotics. Major Forex Pairs There are seven major forex pairs: EUR/USD, USD/YEN, USD/CHF, GBP/USD, AUD/USD, USD/CAD, and NZD/USD. These are – by a distance – the most prominent forex pairs. Euro vs. US dollar trading alone represents about 30% of the multi-trillion dollar trading volume in forex. You’ll also note that the dollar (USD) is part of all seven Majors. That tells us a story in itself – the greenback remains the world’s most important currency. Please note that the first four pairs on the list above are considered the Big 4 Majors, whereas the final three – pairing USD with AUD, CAD, and NZD – are considered the commodity pairs, representing the important export economies of Australia, Canada, and New Zealand. As such, there is debate over whether we should talk of four Majors or seven. Minor Forex Pairs Minor Forex pairs are much more numerous than Majors. Essentially, they are the currency pairs representing some of the world’s most advanced economies. A good example of a minor forex pair is EUR/AUD, representing the Euro and Australian dollar, which are the 2^nd and 5^th most traded currencies respectively. Others include GBP/AUD, AUD/CAD, and GBP/EUR. Thus, when you are shopping around to get the best deal for your travel money before heading to France, you are, in effect, trading the minor forex pair, GBP/EUR. Of course, as a trader, you will have many more trading tools and strategies to use. Exotic Forex Pairs Exotic Pairs represent the biggest group. Basically, an exotic pair is any other pair not listed in Majors or Minors. The currencies represent smaller economies like Sweden and Singapore, and they are usually paired with currencies like the Euro or British Pound. The trading volume of these currencies is very low compared to Minors and Majors, and some pairs might be barely traded at all. For example, GBP/HUF (Hungarian Florint) is one of the Exotics with the lowest volume. What this Means for Trading Forex As we set up previously, the above information is crucial for new forex traders. The difference in the types of pairs is not just in their representations of countries but in the volume of trading and the conditions of trading. As to the latter, we can talk of two distinct elements. The first is that the behaviour of Exotic Pairs is going to be much more volatile than the more established Majors and Minors. Experienced traders love volatility, and they can use it to their advantage. However, it should be noted that Exotic Pairs are more likely to have less data and analysis surrounding them. In short, the less prominent the currency pair, the riskier it can be. In addition, Exotics are likely to have lower liquidity, which acts as a barrier to a trader entering at their desired price. Conclusion: One Facet of a Complex Global Marketplace While we have endeavoured to give some insight into the different categories of forex pairs, it only scratches the surface of the multi-faceted marketplace that connects the world’s currencies. Knowing which category a currency pair lies in does not mean you will be successful trading them. While there are options like copy trading, social trading, algo trading, and, more recently, AI trading tools that can support new traders, nothing beats education. Thankfully, there are many useful resources out there available for free, and they can teach new traders about forex pairs, trading strategies, technical analysis, macro factors like the Brexit vote, and just about everything you need to know about trading foreign exchange online.