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Even though there are several official currencies in circulation around the globe, there are couple of most traded currency pairs that are frequently traded on the forex market. Only the currencies with the highest levels of economic/political stability and liquidity are significantly demanded in currency trading.

Understanding Currency Pairs

Currency pairs function as the foundation of the forex market, holding immense significance in the realm of global finance. These pairs, represent the relative value of one currency against another, and are essential for exchange rate determination. They serve as the framework which aids traders and analysts to base their strategies, use them to gauge market trends, patterns, and potential opportunities.

A currency pair represents the comparative value of two different currencies. It is the reflection of how much one currency is worth in terms of the other currency in the pair. The first currency in the pair is known as the 'base currency' while the second one is the 'quote currency'. For instance, in EUR/USD pair, the Euro (EUR) is base currency and US Dollar (USD) is the quote currency. It explains that how much of USD is required by buy one unit of EUR.

The quote convention for currency pairs is standardized. In most cases, the base currency is expressed as one unit, while the quote currency represents exchange rate. For example, EUR/USD at 1.2067 means one Euro is equivalent to 1.2067 US Dollars.

Types: Major, Minor, and Exotic Pairs

Currency pairs are categorized into major, minor, and exotic pairs based on liquidity, and trading volumes.

Major Pairs (Most Traded Currency Pairs in Forex World)

Major pairs involve the world's most influential currencies. The major pairs are the most heavily traded forex pairs and are widely regarded as the ones that drive the global forex market. The U.S. dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), and Swiss franc (CHF) are the five currencies that make up the major pairs. All the highly traded currency pairs include the USD along with other major currencies of the world.

Some of the major currency pairs are as follows:

  • EUR/USD (Euro/US Dollar)
  • USD/JPY (US Dollar/Japanese Yen)
  • GBP/USD (British Pound/US Dollar)
  • USD/CHF (US Dollar/Swiss Franc)

Minor Pairs

Minor currency pairs refer to those pairs which do not include the USD (US Dollar) is not included and are less common than major currencies. This implies that they can carry higher risk than a major pair and draw wider spreads from brokers. Additionally, their liquidity may be low, making it challenging to trade in them.

Following is a list of minor pairs:

  • EUR/GBP (Euro/British Pound)
  • EUR/AUD (Euro/Australian Dollar)
  • GBP/JPY (British Pound/Japanese Yen)
  • CHF/JPY (Swiss Franc/Japanese Yen)

Exotic Pairs

Exotic pairs combine a major currency with a currency from a growing economy. Since they are less prevalent and riskier than the major and minor pairs, they additionally generate wider spreads and are only profitable under specific circumstances.

Exotic currency pairs include the following:

  • EUR/TRY (Euro/Turkish Lira)
  • GBP/ZAR (British Pound/South African Rand)
  • JPY/NOK (Japanese Yen/Norwegian Krone)
  • NZD/SGD (New Zealand Dollar/Singapore Dollar)

Most Traded Major Currency Pairs

1. EUR/USD (Euro/US Dollar)

The most extensively traded currency pair globally is the EUR/USD. The pair is a combination of the two largest economies in the world. It is impacted by factors that determine how the euro and the dollar are valued relative to other currencies and each other. EUR/USD consistently ranks as the most liquid currency pair that attracts traders and investors looking for stable markets and minimal slippage. Due to the high liquidity, EUR/USD typically has low spreads. Low spreads reduce the cost of trading for participants. Hence, all these factors make it one of the best forex currency pairs to trade.

Both the Euro and the US Dollar are considered stable and are often used as reserve currencies. This stability makes EUR/USD an attractive choice for those who seek safety during the times of market volatility or economic uncertainty. The popularity of EUR/USD makes it possible for traders to accommodate their broad spectrum of needs, contributing to its high trading volume. This leads to well-defined price patterns and trends, which makes it easy to strategize with it when analysing technically.

2. USD/JPY (US Dollar/Japanese Yen)

USD/JPY displays the exchange rate of the US dollar and the Japanese yen. It advises traders of the exact number of Yen required to purchase one US Dollar. Second only to EUR/USD in terms of volume of trading, the Dollar-Yen is one of the most traded forex pairs and serves as a standard for the state of the Asian and even worldwide economies.

The USD/JPY is impacted by factors that affect the relative values of the U.S. dollar and the Japanese yen to other currencies as well as to each other. The difference in interest rates between the Federal Reserve and the Bank of Japan's (BoJ) policy rates has a significant impact on the USD/JPY exchange rate.

The yen becomes a safe currency because of Japan's low domestic interest rates and subsequent deflation, and as a result, its value has tended to increase during seasons of market turmoil. The flow of Japanese investment capital into higher-yielding foreign currencies like the U.S. dollar tends to reverse in times of market stress, which causes the yen to appreciate against the dollar.

3. GBP/USD (British Pound/US Dollar)

It is one of the most traded currency pairs in the world , GBP/USD constitutes under 10% of total global forex trading. As it is one of the most liquid currency pairs, GBP/USD could prove advantageous for traders with shorter time horizons. Spreads are tight and transaction costs are low due to the high liquidity of the currencies.

Due to the deep-sea cables that once transported pricing information between London and New York, the GBP/USD is commonly also referred to as the 'cable'.

4. AUD/USD (Australian Dollar/US Dollar)

It is one of the most popularly traded forex pairs across the international foreign exchange market is the Australian Dollar. The price of AUD/USD represents strength of the Australian dollar relative to the US dollar which is therefore correlated with Australian economic data that tracks employment, GDP growth, consumer confidence, inflation, and other factors.

The Australian Dollar is a significant risk-linked currency, making it highly sensitive to movements in the sentiment of the market. When market conditions are positive, the AUD/USD currency pair tends to rise, but when there are general market challenges, it tends to fall.

The price of Australia's top exports of raw materials, including iron ore, gold, coal, and copper, may also affect the AUD/USD. The success of traders may be enhanced by examining these correlations and comprehending the fundamental parameters underlying the currency pair.

5. USD/CHF (US Dollar/Swiss Franc)

At first, it may seem a little unlikely to have the presence of Swiss Franc as one of the top four currencies. Unlike United States, Europe, Japan, or the UK, Switzerland is not among the major economies of the world.

However, like JPY, the huge popularity of Franc is since it is considered as a stable currency. Due to this, Franc has become a haven in times of market unrest when traders are seeking markets that are less volatile. Switzerland's long-standing reputation for financial stability, safety, and neutrality implies that its reputation is all but secured. Due to Switzerland’s firm economic ties to the eurozone, the Swiss franc also tends to follow market movements of the euro when market volatility is low.

Role of Major Pairs

It is believed that major pairs are the driving forces of the global forex market and are one of the best currency pairs to trade. By accounting for more than 20% of all forex transactions, the EUR/USD is the most actively traded forex pair in the world. The GBP/USD, USD/CHF, and USD/JPY currency pairs round out the top five, each holding a modest share of the global forex market. Given that the major currencies are in circulation throughout the world, major pairs offer tight spreads owing to the high liquidity.

Diversification in Forex Trading

Diversifying the portfolio is the key for forex traders to effectively control risk and increase earnings. Traders can lower their risk exposure and improve the chances of success by trading various currency pairs. It is crucial to take market volatility and spread into account when deciding which currency pairings to trade.

Traders can diversify their portfolios and minimize the consequences of market volatility by being conscious of the correlation between various currency pairs. While negative correlation might help to mitigate potential losses, positive correlation allows traders to profit from rising movements in various currencies. The relationship between currency pairs should be monitored and reevaluated frequently, though, as it is subject to change over time.

Conclusion

In conclusion, having a thorough understanding of the most traded currency pairs is one of the key variables that may determine success in the forex market. Whether a trader is just starting out in trading, or it is an experienced investor, comprehending the dynamics of major pairs, minor pairs, and exotic pairs, reading quotes, and being aware of the factors that influence currency movements can help one make smart trading decisions. Since trading in foreign exchange market offers both potential and risks, the key to achieving trading goals is continuous learning and careful risk management.

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Disclaimer: The information provided on this blog is for educational/informational purposes only and should not be considered financial/investment advice. Trading carries a high level of risk, and you should only trade with capital you can afford to lose. Past performance is not indicative of future results. We do not guarantee the accuracy or completeness of the information presented, and we disclaim all liability for any losses incurred from reliance on this content.