What Are the Most Popular Forex Currency Pairs and Why?
The foreign exchange market is the largest and most liquid financial market in the world, with an estimated daily trading volume of $7.5 trillion according to the Bank for International Settlements (BIS). This figure is more than the annual GDP of most countries and dwarfs other financial markets. In this enormous market, currency pairs are the basic building blocks of all forex trading.
It is important to understand the major forex pairs and, more importantly, what makes them popular and attracts the most trading volume. Popular pairs have a few advantages for both rookie and professional traders: their huge liquidity allows you to enter and exit positions with ease; their small spreads lower your trading costs; and their greater transparency means more effective price discovery and technical analysis.
When you go overseas and exchange dollars at the airport for euros, you are participating in essentially the same process driving the EUR/USD currency pair, the most popular currency pair in the world. The only difference is that forex traders buy and sell those currencies hoping to profit from price movements, and they are not just exchanging money so they can spend it while being on holiday.
The fundamental question that this report, and ultimately our entire website is addressing, is quite simple and critical: what are the most traded currency pairs in the world and why are they rated so highly by millions of traders?
If we can understand why this is the case, it will help us make decent trading decisions when it comes to choosing currency pairs to trade.
The sheer size of the forex market is mindboggling; and it's not just a number, but reflects the decisions made by central banks, multinational corporations, hedge funds and individual traders involved in the international trade of currencies. This creates opportunities for people who know how to follow the market signals and who spot which currency pairs to trade that can give them profitable opportunities with minimal risk.
What Are Forex Currency Pairs?
Before we jump into the most popular pairs, we need to understand what currency pairs are and how they work. A currency pair is the quote of one currency against another. Every pair has a base currency (the first currency in the pair) and a quote currency (the second currency in the pair).
For example, if you're looking at the EUR/USD and it's trading at 1.10, that means you can exchange 1 euro for 1.10 US dollars. The EUR is the base currency and the USD is the quote currency. When you see this rate, you are basically looking at an amount of quote currency (USD) needed to purchase one base currency unit (EUR).
When you look through exchange rates, it is important to see the base currency and keep your focus on the base currency. Understanding how to read exchange rates is the very base of forex trading. If the EUR/USD moves from 1.10 to 1.12, that means the euro has strengthened against the dollarmeans that it requires more dollars to buy the same amount of euros. If the rate falls to 1.08, it means the euro has weakened against the dollar.
Currency pairs fall into three distinct categories, each with unique characteristics:
Major Currency Pairs include the most liquid and frequently traded pairings. Major Currency Pairs always involve the US Dollar (USD) as one of its components, paired with one of the several other major currencies. Major pairs include, EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, and NZD/USD. According to Bank for International Settlements (BIS) data, major pairs represent approximately 84% of all forex market trading activity.
Cross Currency Pairs, or just "crosses" as discussed in Forex trading, contain no USD currency pairing. Some popular crosses include EUR/GBP, EUR/JPY, and GBP/JPY. Crosses can exhibit a different price structure and provide further diversity for traders to capitalize on.
Exotic Currency Pairs, which pair a Major currency and a currency originating from an emerging economy or a smaller economy such as USD for TUR (Turkish Lira), or EUR/ZAR (South African Rand). Exotic Currency Pairs typically will have higher profit potential; however, exotic pairs typically have wider spreads and greater volatility.
The classification system is Major currency Pairs as globally popular beverages they are extremely readily available, are typically very popular retaining a consistent taste, and can be found almost anywhere. Cross currency pairs could be popular in a region, while exotic pairs may provide interesting tastes, but have limited availability, can be pricey and provide less potential overall.
This classification system isn't random; it is grounded in real differences in trading costs, liquidity, and volatility, and these affect your trading experience. Major pairs usually have the tightest spreads and the most predictable price action, making them the easiest to trade from a behavioral standpoint for novice traders, while exotic pairs may offer opportunities to experienced traders who can accept higher costs and risks.
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