What are Currency Pairs?
Currency pairs are an essential aspect of the foreign exchange market, also known as forex. The forex market is a decentralized market where traders buy and sell currencies from around the world. Currency pairs are the currencies of 2 countries that are traded against each other in the forex market. For example, the GBP/USD currency pair represents the Great Britain Pound and the USA Dollar.
Minor currency pairs, also known as cross-currency pairs, do not include the US dollar. Instead, they are pairs of two major currencies traded against each other. We may say the minor currency pairs include EUR/GBP, EUR/JPY, and GBP/JPY. These pairs are less liquid than major currency pairs, which means they may have wider bid-ask spreads and can be more volatile.
Exotic currency pairs are those that include one major currency and one currency from a developing or emerging economy. Examples of exotic currency pairs include the USD/MXN (US dollar and Mexican peso) and the EUR/HUF (euro and Hungarian forint). Exotic currency pairs are the least traded and the most volatile, which can make them riskier to trade.
Currency pairs are quoted in two ways, as direct or indirect quotes. A direct quote is when the domestic currency is the base currency, while an indirect quote is when the domestic currency is the counter currency. For example, if the USD/CAD currency pair is quoted as 1.15, this means it takes 1.15 Canadian dollars to buy one US dollar.
Currency pairs are a crucial aspect of the forex market. Understanding the different types of currency pairs, their characteristics, and how they are quoted is essential for anyone looking to trade forex. It's important to note that forex trading is risky and requires careful consideration of factors such as market volatility, economic indicators, and political events.
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