Depending on your forex broker, you may see the following exotic currency pairs so it’s good to know what they are. While there are EIGHT major currencies, bitstamp review there are only SEVEN major currency pairs. Commodity currencies are those from countries that have large quantities of commodities or other natural resources. The exchange rate of the currencies of these countries are tied to their respective export activities. This is because the strength of the economy can be highly dependent on the prices of their natural resources. Examples of these countries include Russia, Saudi Arabia and Nigeria.

1. Currencies are traded in fixed contract sizes, specifically called lot sizes, or multiples thereof.
2. These are the least traded in the forex market, and are less liquid than the cross pairs.
3. For example, if you buy pound versus US dollar (GBP/USD), you are anticipating a rise in the pound at the expense of the US dollar.
4. When trading currencies, you’re selling one currency to buy another.
5. As a result, when the dollar strengthens against the euro, EUR/USD moves lower, and during periods of dollar weakness (vs. the euro), the pair increases in value.

The total amount of currency trading involving these 18 pairs represents the majority of the trading volume in the FX market. This manageable number of choices makes trading a lot less complicated compared to dealing with equities, which has thousands of possible choices to choose from. Basically, an exotic currency pair includes one major currency alongside an exotic currency. Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, Indonesia, Poland, Chile, Turkey, or Hungary.

Common cross currency pairs involve the euro and the Japanese yen. How active a market is, how many traders are trading, and trading volume determines its liquidity. Volatility is the measure of how drastically a market’s prices change. Lower liquidity commonly results in a more volatile market and causes prices to change drastically.

Understanding Currency Pairs

Check out our list of forex trading strategies to find one that suits your trading personality and goals. When you buy a currency pair from a forex broker, you buy the base currency and sell the quote currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. Due to the overall lower degree of liquidity, exotic currency pairs tend to be far more etoro sensitive to economic and geopolitical events.

The value of the Canadian dollar is also highly correlated with the price of commodities such as crude oil. Because the Canadian economy is heavily reliant on oil, the price of oil dictates the state of the economy and the currency itself. For this reason, the Canadian dollar is often labeled as a commodity currency. Trading the USD/CAD provides high liquidity for investors, and the bid-ask spreads are generally more beneficial. No, exotic pairs are not exotic belly dancers who happen to be twins. Exchange rates fluctuate based on which currency is stronger at the moment.

Trading the USD/CAD Currency Pair

The major currency pairs tend to have the most liquid markets and trade 24 hours a day Monday through Thursday. The currency markets open on Sunday night and close on Friday at 5 p.m. Currency pairs, which can be found within the foreign exchange market, measure the value of one currency against another.

Forex market

Therefore, the EUR/JPY pair must be somehow correlated to one or both of these other currency pairs. The base currency is the one that a trader thinks will go up or down against the second currency in the pair. This second currency is known as the quote or counter currency. For example, if you buy pound versus US dollar (GBP/USD), you are anticipating a rise in the pound at the expense of the US dollar. Profit and loss is normally expressed in the amount of the secondary currency in forex trading.

This floating rate means that the exchange rate continually changes. The currency pairs set the value of one vs. another, and the exchange rates continuously fluctuate based on the respective changing values. There are many official currencies that are used all over the world, but there are only a handful of currencies that are traded actively in the forex market.

Euro vs. Dollar

Don’t confuse minor currency pairs with the seven major currency pairs, all of which include the U. Dollar against one of the seven other most liquid currencies in the world. A currency trader may establish a position where they are simultaneously long the euro and short the dollar. For traders to make a profit, the euro exchange rate must increase. Alternatively, when a forex trader shorts the EUR/USD currency pair, they speculate that the value of the U.S. dollar will rise above the euro.

The euro currency originated because of the Maastricht Treaty in 1992 and was introduced as an accounting currency in 1999. The euro began circulating in countries of the European Union on Jan. 2002 and, over the years, replaced the currencies of most member nations. The euro has become the second most active currency in the world behind the U.S. dollar and the EUR/USD pair sees the most trading in the world of currency pairs trading. There are HUNDREDS of currency pairs in existence but not all can be traded in the FX market. There are 180 legal currencies in the world, as recognized by the United Nations.

In currency trading, only the most economically/politically stable and liquid currencies are demanded in sufficient quantities. For example, due to the size and strength of the United States economy, the American dollar is the world’s most actively traded currency. There are several strategies you could use when trading on currency pairs, depending on the length of the trade, the specific pair and the size of your position.

The price maker (usually a broker) gives you a rate at which they are willing to buy or sell a currency pair. Sometimes the term base currency may also refer to the functional currency of a bank or company, usually their domestic currency. For example, a British bank may use GBP as a base currency for accounting, because all profits and losses are converted to sterling.

This meant it required 1.46 Canadian dollars to buy 1 U.S. dollar. The G10 currencies are ten of the most heavily traded currencies in the world, which are also ten of the world’s most liquid currencies. For example, a political scandal or unexpected election results can cause an exotic pair’s exchange rate to swing violently. The more frequently traded something is the higher its liquidity.