Forex trading is the trading of currency pairs, i.e. buying one currency while selling another, even though there is no physical exchange of money at any time. The strength of a currency goes up and down and, as the strength of the currency fluctuates, so does the exchange rate of a currency pair. Traders want to make a profit by betting on whether the currency will appreciate or depreciate against another currency. When you see a currency pair, the first currency is known as the base currency, while the second is known as the quote currency. When you buy a currency pair, you are actually buying the base currency while selling the quote currency and, when you sell a currency pair, you are selling the base currency at the same time you buy the quote currency. It is important to do some research before you start trading currency pairs, as there are many factors that can affect the success of your trades.
Main Forex Pairs
There are seven major currency pairs – pairs that include the US dollar (USD). These are the most and most frequently traded pairs in the world. These are the EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD and NZD/USD pairs. The main pairs have very liquid markets and are traded 24/5 – i.e. every hour of every working day. These pairs also have very low spreads.
Cross Currency Pairs
Cross currency pairs are currency pairs that do not contain the USD. There are major currency pairs or crosses and these are known as minor or minor currency pairs. The smaller active pairs have the EUR, JPY and GBP. These are also very liquid markets, although not as liquid as the major currency pair market and have slightly wider spreads than the major currency pairs.
Exotic Currency Pairs
Exotic currency pairs are currency pairs that include a major currency paired with the currency of an emerging country, for example, Hungary, Thailand, Mexico, South Africa or Brazil. These are traded less frequently, so the market is not as liquid as in major or smaller pairs and spreads are significantly wider.