Forex is the abbreviation of Foreign Exchange, that is, the currency exchange. The foreign exchange market is the largest and most liquid globally, with a volume per day that exceeds 5 trillion dollars. In this market, assets come in pairs, so when you trade them, what you are doing is buying one currency and selling another.
In currency pairs, the first currency that appears on the left is called the base currency. The second currency is termed the quote currency. Therefore, if you have the pair EUR/USD = 1.0963, it means that 1 euro is equivalent to 1.0963 US dollars. When operating in the market, it is done with respect to the base currency. If there is a sentiment that the euro will depreciate, the currency would be sold and exchanged into US dollars.
It is also important to note that the different currency pairs can be classified into major, minor, and exotic pairs. Next, we will see the pairs that belong to each group and their characteristics.
Major pairs are those that contain the US dollar, either as a base or quoted currency. These are the most exchanged currency pairs in the market and therefore, they are usually the most liquid and with the lowest spreads. The main pairs are EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/JPY, USD/CAD, USD/CHF.
Also known as cross pairs, minors are the currency pairs formed from the main pairs but eliminating the US dollar. In general, these pairs are also well liquid, and their spreads are not usually high.
They are: EUR/GBP, EUR/AUD, EUR/NZD, EUR/JPY, EUR/CAD, EUR/CHF, GBP/AUD, GBP/NZD, GBP/JPY, GBP/CAD, GBP/CHF, AUD/NZD, AUD/JPY, AUD/CAD, AUD/CHF, NZD/JPY, NZD/CAD, NZD/CHF, CAD/JPY, CAD/CHF, CHF/JPY.
These currency pairs are combined with a major currency and a currency from an emerging economy or a slightly weaker economy. For example, the Won from South Korea, the Mexican Peso from Mexico, and the Hungarian Forint. These currency pairs are not generally liquid as they are not as traded. It causes their spreads to be much higher than those of the major and minor pairs.
It is essential to know these rankings because even though Forex is said to be a 24/7 open market, some pairs will not be available at all times due to low liquidity. Keep in mind that operating them carries additional risks.
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