Currency pairs are categorized as majors (most traded, high liquidity), minors (less liquid but still significant), and exotics (emerging market currencies with higher risk). Understanding these categories helps traders make informed decisions based on volatility, spreads, and trading hours.
The foreign exchange (Forex) market is the largest and most liquid financial market in the world, with a daily trading volume exceeding $6 trillion. At the heart of Forex trading are currency pairs - the quotation of two different currencies, with the value of one being quoted against the other.
For beginners entering the world of Forex trading, understanding currency pairs is fundamental. This comprehensive guide will walk you through the three main categories of currency pairs - majors, minors, and exotics - explaining their characteristics, advantages, and risks.
Forex charts display the price movements of currency pairs over time (Source: Unsplash)
What Are Currency Pairs?
A currency pair is a quotation of two different currencies where the value of one currency (the base currency) is quoted against the other (the quote currency). The price of a currency pair represents how much of the quote currency is needed to purchase one unit of the base currency.
For example, in the EUR/USD pair:
- EUR (Euro) is the base currency
- USD (US Dollar) is the quote currency
- If EUR/USD is trading at 1.1200, it means 1 Euro can be exchanged for 1.12 US Dollars
The most traded currency pair in the world is EUR/USD, accounting for about 24% of all Forex transactions. This pair is known for its tight spreads and high liquidity, making it a favorite among traders.
The Three Categories of Currency Pairs
Currency pairs are generally classified into three main categories based on their liquidity, trading volume, and the economies they represent:
1. Major Currency Pairs (The Majors)
Major currency pairs consist of the most frequently traded currencies globally, all paired with the US Dollar (USD). These pairs account for about 75% of all Forex transactions and are characterized by:
- High liquidity
- Tight spreads (difference between bid and ask price)
- Lower volatility compared to other pairs
- Extensive market coverage and analysis available
| Currency Pair | Currencies | Nickname | Average Daily Range (pips) |
|---|---|---|---|
| EUR/USD | Euro / US Dollar | Euro | 70-100 |
| USD/JPY | US Dollar / Japanese Yen | Gopher | 50-80 |
| GBP/USD | British Pound / US Dollar | Cable | 80-120 |
| USD/CHF | US Dollar / Swiss Franc | Swissy | 60-90 |
| AUD/USD | Australian Dollar / US Dollar | Aussie | 60-90 |
| USD/CAD | US Dollar / Canadian Dollar | Loonie | 60-90 |
| NZD/USD | New Zealand Dollar / US Dollar | Kiwi | 50-80 |
While major pairs are generally less volatile, they can still experience significant movements during major economic announcements like Non-Farm Payroll (NFP) reports or Federal Reserve interest rate decisions. Always check the economic calendar before trading.
2. Minor Currency Pairs (Cross-Currency Pairs)
Minor currency pairs, also known as cross-currency pairs or simply "crosses," don't include the US Dollar. These pairs typically consist of other major currencies traded against each other. While they're less liquid than majors, they still offer good trading opportunities:
- Moderate liquidity
- Slightly wider spreads than majors
- Often more volatile than major pairs
- Can provide diversification in a trading portfolio
Some popular minor currency pairs include:
| Currency Pair | Currencies | Average Daily Range (pips) | Characteristics |
|---|---|---|---|
| EUR/GBP | Euro / British Pound | 40-70 | Less volatile, popular in European trading |
| EUR/JPY | Euro / Japanese Yen | 80-120 | More volatile, popular carry trade pair |
| GBP/JPY | British Pound / Japanese Yen | 100-150 | Highly volatile, known as "The Beast" |
| AUD/JPY | Australian Dollar / Japanese Yen | 70-110 | Risk-sensitive, popular carry trade |
| CAD/JPY | Canadian Dollar / Japanese Yen | 60-100 | Oil price correlation |
Cross-currency pairs often reflect the relative strength between two economies. For example, EUR/GBP can be a good pair to trade when there are divergent monetary policies between the European Central Bank and the Bank of England.
3. Exotic Currency Pairs
Exotic currency pairs consist of one major currency paired with the currency of an emerging or smaller economy. These pairs are less liquid and more volatile than majors and minors:
- Low liquidity
- Wide spreads
- Higher volatility
- More susceptible to political and economic instability
- Often subject to capital controls
Examples of exotic currency pairs include:
| Currency Pair | Currencies | Average Daily Range (pips) | Key Considerations |
|---|---|---|---|
| USD/SGD | US Dollar / Singapore Dollar | 30-60 | Stable economy, popular in Asia |
| USD/HKD | US Dollar / Hong Kong Dollar | 10-30 | Pegged currency, very stable |
| USD/TRY | US Dollar / Turkish Lira | 200-400 | Extremely volatile, high inflation |
| EUR/TRY | Euro / Turkish Lira | 250-500 | High volatility, interest rate sensitive |
| USD/ZAR | US Dollar / South African Rand | 150-300 | Commodity currency, political sensitivity |
| USD/INR | US Dollar / Indian Rupee | 20-50 | Subject to RBI regulations, limited trading |
Exotic currency pairs can be dangerous for beginners due to their unpredictable nature, wide spreads, and potential for sudden, sharp movements. These pairs often require specialized knowledge about the particular country's economic and political situation.
How to Choose the Right Currency Pairs to Trade
Selecting which currency pairs to trade depends on several factors, including your trading style, risk tolerance, and market conditions:
For Beginners
If you're new to Forex trading, it's generally recommended to start with major currency pairs because:
- They have the tightest spreads (lowest trading costs)
- High liquidity means you can enter and exit positions easily
- Abundant educational resources and analysis available
- More predictable movements during major trading sessions
For Day Traders
Day traders who capitalize on short-term price movements might prefer:
- Pairs with higher volatility (like GBP/JPY or AUD/JPY)
- Pairs that align with their trading session (EUR/USD during London session, USD/JPY during Tokyo session)
- Pairs with clear technical patterns due to high liquidity
For Swing Traders
Swing traders who hold positions for several days might consider:
- Pairs with strong trending characteristics
- Cross-currency pairs that reflect economic divergences
- Pairs that align with fundamental themes (like commodity currencies during resource booms)
For Carry Traders
Carry traders who seek to profit from interest rate differentials might look at:
- Pairs with wide interest rate spreads (like AUD/JPY or NZD/JPY)
- Stable currencies where the interest differential is likely to persist
- Currencies from countries with strong economic fundamentals
Professional traders often monitor multiple currency pairs simultaneously (Source: Unsplash)
Understanding Currency Pair Correlations
Currency pairs don't move in isolation - they're often correlated with each other, meaning they tend to move in similar or opposite directions. Understanding these relationships can help with risk management and trade diversification.
Positive Correlation
Pairs that tend to move in the same direction:
- EUR/USD and GBP/USD: Often move similarly as both represent European currencies against the USD
- AUD/USD and NZD/USD: Both are commodity currencies from the Asia-Pacific region
Negative Correlation
Pairs that tend to move in opposite directions:
- EUR/USD and USD/CHF: Traditionally move inversely (when EUR/USD goes up, USD/CHF goes down)
- USD/JPY and Gold (XAU/USD): Often have an inverse relationship as both are considered safe havens
Currency correlations aren't static - they can change over time based on economic conditions and monetary policies. It's important to regularly check current correlation coefficients rather than relying on historical relationships.
Trading Sessions and Currency Pairs
The Forex market operates 24 hours, but different currency pairs are more active during specific trading sessions:
| Trading Session | Time (GMT) | Most Active Pairs | Characteristics |
|---|---|---|---|
| Sydney/Tokyo | 11PM - 8AM | AUD/USD, NZD/USD, USD/JPY | Asian currencies most active, generally lower volatility |
| London | 8AM - 5PM | EUR/USD, GBP/USD, USD/CHF | Highest liquidity, major economic data releases |
| New York | 1PM - 10PM | All USD pairs, CAD pairs | High volatility, overlaps with London session |
The most volatile trading period is during the overlap of the London and New York sessions (1PM - 5PM GMT), when about 70% of all Forex transactions occur. This is often the best time to trade major currency pairs.
Risk Management with Different Currency Pairs
Different currency pairs require different risk management approaches:
Majors
- Tighter stops can be used due to lower volatility
- Position sizes can be larger due to tighter spreads
- Less likely to experience sudden, unexpected gaps
Minors
- Wider stops often needed to account for higher volatility
- Smaller position sizes may be appropriate
- Be aware of potential for sharper retracements
Exotics
- Much wider stops typically required
- Smallest position sizes recommended
- Be prepared for sudden, news-driven movements
- Higher margin requirements may apply
Free Forex Trading Guide
Download our comprehensive PDF guide to learn more about Forex trading strategies, risk management, and how to get started in the currency markets.
Download Free PDFFinal Thoughts: Building Your Currency Pair Strategy
Understanding currency pairs is fundamental to Forex trading success. Here are some final recommendations:
- Start simple: Begin with 1-2 major currency pairs and master them before expanding
- Understand the economies: Know what drives each currency in your pairs (interest rates, commodities, etc.)
- Match pairs to your personality: If you prefer calm markets, stick to majors. If you thrive on excitement, consider some crosses
- Watch correlations: Avoid overexposure to similar-moving pairs
- Respect the sessions: Trade pairs when their primary markets are open
Ready to Start Trading Currency Pairs?
Join our comprehensive Forex trading course and learn how to profit from currency movements with professional strategies.
Enroll NowContinue Your Forex Trading Education
