Understanding the mechanism of trading in forex with the pairs system is one of the difficulties that may face new traders, especially if they are stock market investors, as the matter differs slightly. In the following article, we will shed light on the concept of the pairs system in the forex market and identify the most famous and essential currency pairs traded in the market.
The most famous and strongest global currencies
Before we talk about the concept of currency pairs in Forex, we must get acquainted with the most famous global currencies, which are the currencies of major countries, which have economic weight, and they are eight currencies:
- US Dollar (USD) is the currency of the United States of America
- Euro (EUR) is the currency of the European Union countries – and is called Fiber or Fiber
- Pound sterling GBP is the currency of Britain
- JPY, the currency of Japan, is called Yen
- Australian dollar, AUD, is the currency of Australia and is called the Aussie
- New Zealand dollar (NZD) – the currency of New Zealand – is called Kiwi
- Canadian dollar (CAD) – the currency of Canada – is nicknamed Loonie
- Swiss Franc CHF – which is the currency of Switzerland – is nicknamed Swissy or Swissy
Concept of currency pairs trading system
Trading in the currency market or forex differs slightly from trading in the stock market, the trading process does not include one currency but includes two currencies together, at the time you buy one currency, you are necessarily a seller of another currency, somewhat similar to the system of exchange or barter.
Imagine that you have an amount of US dollars, and you go to a currency exchange office to exchange the dollar for the corresponding Saudi riyal. Note that the process contains two currencies and not one currency, you sold dollars to buy the Saudi riyal according to the exchange rate of the US dollar against the Saudi riyal, which is what is happening in the currency market.
Therefore, trading in the forex market is known as the Pairs Trading system. All two currencies are brought together in one pair so that one currency is traded against the other.
Let’s take an example for further clarification:
The first currency in a currency pair is called the base currency and the second is called the counter currency. Each currency pair has an exchange rate.
In the previous example, the base currency is the US dollar, its symbol is USD, and the counter currency is the Saudi riyal SAR. The exchange rate is the required amount of the counter currency “Saudi riyals” to buy one unit of the base currency “US dollar”, which equals 3.7509 Saudi riyals to buy one dollar.
What are the most popular currency pairs in forex?
Forex currency pairs differ in terms of trading volumes, popularity, or the degree of difficulty in executing their deals and liquidity in the markets. Still, we can say that the most popular classification of currency pairs can be divided into three classifications, which are:
- Major currency pairs
- Cross currency pairs
- Exotic, rare or exotic currency pairs
In the following sections, we will shed light on each concept of each classification and the currencies it includes.
Major currency pairs
They are the currency pairs in which the US dollar (USD) is a party, whether a base or a counter currency. The other party is a currency of the major industrialized countries, namely the countries of the eurozone, Japan, Britain, Switzerland, Canada, Australia, New Zealand, which are:
- EUR/USD Euro/Dollar
- GBP/USD British Pounds/Dollars
- USD/JPY is a dollar/yen
- USD/CHF Francs/dollar
- USD/CAD US dollar/Canadian dollar
- AUD / USD Australian Dollar/US Dollar
- NZD/USD New Zealand Dollar/US Dollar
Why is the US dollar the strongest currency?
Because it took its leadership since the end of World War II and the signing of the Bretton Woods Agreement in which currency rates were linked to the US dollar, and the US dollar is considered the main cash reserve currency for central banks in various governments. It is the pricing measure for most commodities such as gold, oil, silver, etc., so it can be said that The US dollar is the undisputed master of the world’s currencies.
It is worth noting that dealing with currencies or their major pairs is considered one of the most important features of Forex for traders, as about 90% of the volume of currency market trading takes place on major currencies (US dollar, British pound sterling, euro, Japanese yen, Swiss franc, Canadian dollar, dollar Australian and New Zealand Dollars) and thus following them creates good trading opportunities from them.
Thus, the acquisition of these currencies on a large amount of trading volume in the currency market contributed to increasing the interest and follow-up of traders and investors on the major currency pairs in Forex.
Cross currency pairs
They are currency pairs in which the US dollar is not a party. Usually, the liquidity and trading volumes on the cross-currency pairs are lower than the major currency pairs, so you will notice that their spreads are higher than the main ones, and the cross-currency pairs receive attention And the follow-up of speculators in forex because of its strong movements, especially those pairs that have both sides of the major currencies.
The most popular cross-currency pairs that attract the attention of traders in the forex market are:
- EUR/GBP Euro/British Pound
- EUR/JPY Euro/Yen
- EUR/CHF Euro/Franc
- GBP/JPY British/Pound Yen
They are called cross pairs in Forex because their exchange rates are the intersection of the exchange rates of two major currency pairs, meaning that they are equal to the product of the prices of two pairs. To get the exchange rate of the British pound yen, we multiply the GBP/USD exchange rate by the USD/JPY exchange rate.
Exotic currency pairs
In forex, exotic or exotic currency pairs include emerging market currencies. These pairs are less liquid or large than the financial markets, and the spreads are usually much more extensive. These currency pairs are against the US dollar or significant currencies such as:
- USD/DKK American Dollar/Danish Krone
- USD/HKD US Dollar/ Hong Kong Dollar
- EUR/ZAR Euro/ South African Rand
- GBP/SEK British Pound Sterling/ Swedish Krona
Note that naming currency pairs in forex in terms of the order of the first currency, “base currency,” or the second currency, “counter currency,” is a standard designation and is never changed. For example, the Australian dollar pair (AUD/USD) will remain the same as the Australian dollar It cannot be called (USD/AUD).