Forex Currency Pairs Explained: Guide to Major & Best Pairs

What Are Forex Currency Pairs?

The foreign exchange market is quite different from other markets. A distinction is reflected in the smallest element of the forex markets—the instruments traded in it. Stock markets facilitate trading in shares, the smallest unit of a public company; a trader in the commodities market owns instruments based on perishable (sugar, wheat) and non-perishable (gold, oil) goods.

In forex, every instrument is a comparison between two currencies—a base and a quote currency. A forex currency pair shows the amount of quoted currency required to get a unit of the base currency.

Understanding how pairs are traded, who participates in the market, and what drives the fluctuations in this market is integral to understanding how forex and forex currency pairs work. So, let’s make these foreign concepts more familiar.

How Do Forex Currency Pairs Work?

There’s a catch in the exchange of the foreign exchange market. Unlike a usual trade where one instrument is exchanged for something, FX trading involves a simultaneous exchange of the currencies that form a pair. By entering a forex transaction, you’re acquiring the base currency while selling the quote currency.

Let’s take EUR/USD for example. The pair is trading at 1.1000, which means you will have to spend one dollar and 10 cents to get a euro. As a trader, you think the dollar is going to strengthen. To capitalize on this, you can short the EUR/USD pair. If you are bullish about the euro, then you buy or go long on the pair.

Now, that’s not it, because USD/EUR is also a pair you can trade in. So, when you feel the dollar is on its way up, you can go long on USD/EUR, too. You can choose pairs with your preferred base currency. However it is, you must pay attention and choose the right pair to trade in.

Types of Forex Currency Pairs

Foreign exchange pairs can be categorized based on liquidity, the base currency, and the economic strength of the currencies involved. With participants ranging from retail individuals to reserve banks, forex serves an extensive range of traders. The following are the offerings of this vast market:

Major Forex Pairs

Major forex pairs are the most traded currencies in the world and include currencies of all major economies. USD is present—either as a base or quote—in all major currency pairs as it is a global reserve and settlement currency. Some examples are USD/JPY and GBP/USD. Some other features of major forex pairs are:

• Extremely high liquidity and the tightest spreads
• Consistent price action with moderate volatility
• Influenced by:
  • Macroeconomic news
  • Central bank policies

Minor Forex Pairs

Minor pairs or “cross-currency” pairs still involve currencies of major economies or the most traded currencies. What sets minor pairs apart from major forex pairs is that the USD is not present in the equation. These pairs include EUR/GBP, GBP/JPY, and so on. Points to remember when dealing with cross-currency pairs are:

• Moderate liquidity and slightly wider spreads
• Exhibit sharper intraday swings than major pairs
• Influenced by:
  • Regional data
  • Interest rate divergences

Exotic Pairs

Forex is not just for the currencies of top global economies. In exotic forex pairs, the currency of an emerging economy is paired with a bigger currency. USD/BRL (Brazilian Real), EUR/TRY (Turkish Lira) are some exotic pairs available in the forex market. Some notable features of exotic pairs are:

• Low liquidity and wider bid–ask spreads
• Sharp, often unpredictable price movements
• Influenced by:
  • Niche & broad regional concerns
  • Speculation & institutional inflows

Exploring the Top 7 Forex Currency Pairs

The forex market boasts an astounding daily turnover exceeding $7.5 trillion, making it one of the most liquid markets in the world. In this vast market, there are a few pairs that garner more attention than others. These currencies have higher participants; therefore, liquidity is high, slippage is low, and volatility—though dependent on macroeconomic factors—is mostly predictable.

These major forex trading pairs are among the best forex currency pairs to trade for beginners and seasoned traders alike. Let’s look at the seven most popular currency pairs.

Forex Liquidity, Pips & Spreads

To understand and trade in forex with confidence, every trader must know the fundamental building blocks of the market. You must have read the term “spreads” already, and you must have an idea about what liquidity means. Let’s understand in depth what these two concepts and what percentage in point in forex trading mean.

Liquidity

Liquidity refers to how easily an asset, or in this instance, currency pairs, can be bought or sold. Major pairs like USD/EUR and USD/JPY have the highest liquidity. Banks all over the globe use USD as a reserve currency.

Therefore, demand for major pairs is always high. High liquidity could mean the following things for traders:

• Lower slippage
• Ease of entering and exiting trades

If pairs have lower liquidity, you can expect:

• Execution risk
• Lower predictability

Pips

Even the smallest price changes have a significant impact on trade. In the forex market, where institutions like central banks participate, these minute differences matter a lot. In forex, the rates for most pairs are counted to the fourth decimal.

For example, the quote for EUR/USD is 1.0011. Pips represent the smallest possible price change in a pair. Pipettes (fractional pips) are also present in some platforms that offer up to 5th decimal calculations.

Spreads

Forex rates are determined and influenced by several forces. Geopolitics, interest rates, employment reports, natural disasters, and many other factors can shift traders’ sentiments in the forex markets. The spread is the exciting gap between what buyers are eager to pay (bid price) and what sellers want to receive (ask price). Tighter spreads (low difference between bid and ask) are preferred because:

• Traders can capture market efficiently
• Can symbolize high volume and liquidity

When a pair has wider spreads, maybe due to volatility or lower participation, it could translate to:

• Higher execution costs
• Difficulty entering or exiting trades

Correlation in Forex Pairs

Accounting correlation between the two currencies in the same pair, and between two pairs, is all part of forex trading strategies. Events across the globe do impact these currencies, but they are influenced by each other, too. When trying to capitalize on opportunities presented by the forex market, recognizing the correlation between these currencies can ensure you enter and exit the market favorably.

Here are some reasons why the correlation between forex currency pairs matter:

• Helps you have a more informed bias
• Prevents overexposure to the same event
• Unveils diversification and hedging opportunities
• Supports analysis and consistency in performance

Types of Correlation

Correlations are of three types: positive, negative, and zero.

When currency pairs have a positive correlation, they move in the same direction. That means the factors that drive changes affect both these pairs in the same manner. GBP/USD and EUR/USD have a positive correlation, as both are quoted against USD.

Negative correlation between two currency pairs will make one pair rise while the other falls, though not always in a causal way. Pairs like USD/JPY and EUR/USD have a negative correlation.

Zero correlation is hard to find in the forex market, as all pairs being traded in some way influence each other.

Pros and Cons of Trading Major Forex Pairs

From forex scalping to positional trading, there are ups and downsides to trading in forex. Let’s look at some benefits and drawbacks of trading in major vs less popular pairs:

Real-World Use Cases & Trading Examples

Real-life currency trading examples will always come in handy to understand how market shifts and opportunities appear. Here's one:

Hedging with Forex

A European manufacturer has a US client who accounts for 80% of his income. He knew that NFP (Non-Farm Payroll) data was about to come out, and he feared the USD would weaken. He could use forex pairs of USD/EUR or EUR/USD to hedge his position and reduce exchange rate risk.

After recognizing the support and resistance levels, he shorts EUR/USD. The NFP data beat expectations, and the USD strengthened as a result. His analysis and timely position-taking helped him avoid the risk of loss due to exchange rate changes.

Strategies for Trading Forex Pairs

Fundamental and technical analysis play the role of a cushion in the forex market. When the market swings, properly placed stop-limits help soften the blow and allow you to capitalize without obsessing over every pip change. Mastering the following strategies can help you become a good trader.

Fundamental Analysis

Fundamental analysis of forex currency pairs is to decipher why currencies move. Traders assess several types of forex indicators, like economic reports, interest rates, GDP growth, inflation reports, central bank policies, employment data, and so on. Here are some forex fundamental strategies to look into:

• Carry Trade
• NFP News Trading
• Interest Rate Parity Arbitrage

Technical Analysis

Being able to read forex charts in forex trading is as fundamental as knowing the alphabet to read. Patterns, trendlines, and candlestick shapes come together like puzzle pieces. They tell traders when to buy, sell, and wait. Some popular technical strategies are listed below:

• Moving Average Crossover
• Fibonacci Retracement Strategy
• Bollinger Band Squeeze

Risk Management Strategies

Forex pairs come with their own fluctuations and influences. Trading in these pairs with leverage further expands exposure and risks. To trade in forex—with both long and short-term positions—requires meticulous assessment of market volatility, recognition of risk temperament, and the risk tied to your chosen pair. Given below are some common rules:

• 1% Position Sizing
• Hedging with correlated pairs
• Trailing Stop Loss

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Conclusion

Every forex movement is a cumulative result of movements in the world’s economies. In this vast market, trading is about learning, discipline, patience, and self-control. The best forex currency pairs to trade in will fail if the trader is not sure about themselves and the markets.

With structure, consistency, and a sound strategy, you can clear out all noise and convert chaos into opportunity. Mastering your and the market’s psyche can start with a simple lesson about forex trading strategies today!

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