Currencies are traded through a forex broker or a bank and they are quoted and traded in pairs. The most popular pairs are those that include the U.S dollar. These pairs are called Majors because they are traded most often.
Currency symbols always have 3 letters, where the first two letters identify the country and the third letter stands for that country’s currency. Take AUD for instance: AU stands for Australia and D stands for Dollar.
Which are the best pairs to trade?
Overall, there are more than a hundred different currency pairs so one of the first decisions you have to make is which pair to choose. A general rule of thumb is to stick to trading majors, but there are many traders who are successfully trading other types of pairs.
There are 3 types of currency pairs:
The most traded currency pairs in the world are called the Majors. They involve the currencies euro EUR, U.S dollar USD, Japanese yen JPY, pound sterling GBP, Australian dollar AUD, Canadian dollar CAD, and the Swiss franc CHF.
Majors are the most convenient pairs to trade not only for beginners but also for experienced traders. They have the highest liquidity of rate movements. Majors are also more stable and predictable because the developed countries are less prone to sudden crazy political or economic changes.
Cross-currency pairs are those that do NOT have the USD in them. They are called crosses because, in the old times, most currencies were fixed to the USD. In order to exchange currency, it first had to be exchanged to USD.
Examples of crosses:
Exotics are currency pairs that contain a currency of a developing country from Asia, Africa, the Middle East, the Pacific or South America. Exotic pairs are traded less often so their liquidity is very low and the spreads can be super high.
Exotics are mostly traded by high-level traders who have inside information about a country’s economy. One example again is George Soros who managed to make $790million by trading against Thai baht as he had foreseen the weakness of the Asian banking system and its official.
Some examples of the exotic currencies:
● Hong Kong dollar – HKD
● South African rand – ZAR
● Thai baht – THB
● Singapore dollar – SGD
● South Korean won – KRW
● Mexican peso – MXN
● Russian Federation ruble – RUB
● Indian rupee – INR
How to read currency rates
Reading currency rates might seem easy until someone asks you to read them out and explain what exactly the rate number represents.
A nice trick is to think of the base currency as number one.