What are forex pairs?
As we’ve mentioned previously, currencies are traded in pairs, meaning you’re always buying one currency while simultaneously selling another.
Why is this the case? Say you go to a bank to exchange currencies ahead of a business trip to Japan. You give the bank your U.S. dollars and in return, they give you Japanese yen.
What you’ve effectively done in this exchange is sold your dollars and bought yen. See? Buy one currency and sell another.
How to understand currency pairs
Currencies are represented by a three-letter code that usually denotes their country of origin and name. U.S. dollars are abbreviated USD, for example, whereas Japanese yen are JPY.
Pairs are then represented by the two abbreviations together, usually separated by a forward slash. So, if you wanted to trade dollar against yen, you’d be looking to trade USDJPY.
The first currency in a pair is called the base and the second is known as the quote. Forex prices show you how much 1 unit of base currency is worth in quote currency. So, if USDJPY = 107.04, this means that 1 dollar can buy you a little over 107 yen.
The different types of currency pair
Currency pairs are usually separated into three distinct categories.
Major currency pairs
The majors are the most traded pairs on the forex market, and all include the U.S. dollar. These pairs account for a lion’s share of the daily trading volume, recorded at almost 62% in April 20191. Of course, this is not surprising, when the dollar itself is involved in over 88% of forex trades1.
There are generally considered to be 7 Major pairs including EURUSD, USDJPY, GBPUSD, USDCHF, USDCAD, AUDUSD and NZDUSD.
Minor currency pairs
The minors, also known as crosses, are currency pairs that don’t include the U.S. dollar. The most-traded crosses are those made up of two other major currencies.
Some examples of minors include GBPJPY, EURGBP, EURCHF, EURJPY, AUDCHF and NZDCAD.
Exotic currency pairs
Exotics involve a major currency paired with that of an emerging economy. These pairs are some of the least traded on the market, which can make them some of the costliest to trade due to low liquidity.
Examples of Exotic pairs include USDTRY, USDZAR, ZARJPY and EURTRY.