Currency Pair Buying and Selling

Currency Pair Buying and Selling: Lesson no 3

So, let’s start with an overview of forex trading.

It’s similar to a money dance, in which you buy one currency while selling another. All of this occurs via a “forex broker” or a “CFD provider.” And here’s the thing: currencies, like BFFs, always arrive in pairs.

Consider the euro versus the US dollar, or the pound versus the Japanese yen. We discuss them in pairs, as if we were playing tug-of-war with companions on opposite sides.

Now, in this forex game, you can either purchase or sell these currency pairings. It’s as if each pair is constantly playing tug-of-war, with the exchange rate serving as the scoreboard. This rate indicates how much one currency is worth compared to another.

There are three interesting categories of currency pairs:

The “majors” always include the US dollar.

The “crosses” – Do not align with the US dollar. If they involve any major currencies, we refer to them as “minors.”

The “exotics” – These partnerships combine the major shots with currencies from emerging markets.

So, in simple terms, forex trading is the exciting game of buying and selling currency pairings, with each pair constantly battling for dominance.

Major Currency Pairs

The “majors” are the currency pairs that are listed below.

These currency pairs are popular, and they all include the United States dollar (USD). They’re the most well-known and discussed because they’re frequently exchanged.

Currently, there are only seven main currency pairs among the eight major currencies. It’s similar to having a group of friends who cooperate in unique ways.

Here’s the deal: compared to the other pairings (which we’ll discuss later), the values of these majors swing around a lot, offering you more opportunities to make some clever trading decisions.

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Okay, let’s talk about the majors, which are the big players in the trading market.

So, what is liquidity? It’s similar to the interest in the financial market, and in forex, it all depends on how many people are actively trading a currency pair and how much they’re trading.

Consider this, the more people trade something, the more liquid it is. Consider the EUR/USD and AUD/USD pairs, for instance. More people are trading the EUR/USD, and they’re doing it in larger amounts than the AUD/USD. So guess what? The EUR/USD is the more liquid pair.

Major Cross-Currency Pairs or Minor Currency Pairs

Okay, let’s get into the world of “cross-currency pairs,” or simply the “crosses.”

Here’s the deal: when we say “crosses,” we mean currency combinations that contain two major currencies but exclude the US dollar. Simple, right? We also call them “minors” when they include large currencies.

Now, these crosses aren’t as popular as the big boys (the majors), but they’re still pretty liquid, which means there’s action and decent trading chances.

Quick tip: Do not mix minor currency combinations with the seven big ones. Those seven majors always test the US dollar against other major currencies.

The most popular crosses are the major three: EUR, JPY, and GBP.

Euro Crosses

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Yen Crosses

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Pound Crosses

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Other Crosses

Exotic Currency Pairs

Now let’s look at the exotic pairs. They are not twin belly dancers from a mile away!

Exotic currencies are issued by countries that are still figuring out how to handle the global economy. Think of countries like Brazil, Mexico, Chile, Turkey, and Hungary.

So, what’s an exotic currency pair? It is a combination of one major currency (the big shooters we discussed earlier) and a currency from a country that is still rising economically.

Look at the chart below to see some examples of these exotic pairs. Want to guess what those symbols represent?

Just so you know, these pairs are not as popular as the big guys or the crosses. Trading them may cost you a little extra, but they give a spicy flavour to the forex market.  

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Now, let’s talk about something important in exotics: spreads. These can be two or three times larger than in pairs like EUR/USD or USD/JPY. It’s like a bigger playground, but you must be prepared for it.

Because exotics aren’t as popular as the big boys, they’re more like sensitive souls. They respond significantly to economic and geopolitical events. A political crisis or a surprise election outcome might cause an exotic pair’s exchange rate to dance wildly.

So, if you’re considering getting into exotics, bear this in mind when making your decisions. They’re the drama queens of the currency industry.

And for those who are truly enchanted by exotics, here is a more complete list.

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Aside from the three primary categories of currency pairs we discussed, there are several other “groups” of currencies floating about in the FX industry. You need to know about them.

G10 Currencies

Okay, let’s talk about the G10 currencies. These are the “popular kids” of the forex world, ten of the most traded and liquid currencies worldwide.

They are often traded, and their exchange rates are not significantly affected. It’s like a relaxed party where everyone is invited.

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The Scandies

Okay, everyone, let’s have a look at Scandinavia, that cool spot in Northern Europe that’s rich in history and culture.

So, when we say Scandinavia, we mean Denmark, Norway, and Sweden. These people belong to a shared currency club called the “Scandies.”

Denmark and Sweden decided to form a monetary union some time ago, and Norway later joined them. Consider having one currency but still allowing each country to have its own coins – cooperation, right?

Fast forward to the beginning of World War I, when things got insane, and the gold standard had to be dropped. The Scandinavian Monetary Union had to quit, but these countries decided, “Hey, we’ll keep our cool currency, just with different values.”

Now, consider this their currency is named the “krone or krona,” which literally means “crown.” What are the spelling differences? That’s just the languages playing around.

So, why is it called crown currencies? It sounds cooler than asking, “Give me some dollahs,” right? “Hook me up with some crowns, yo!” Cool, huh?

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Okay, let’s keep the chill feelings continuing! Check it out SEK and NOK are like rockstar nicknames for the Swedish Krona and Norwegian Krone “Stockie” and “Nokie.”

When combined with the US dollar, they form a unique language. USD/SEK? That’s what we call a “dollar stockie.” What about USD/NOK? It is all about “dollar Nockie.” How cool is that? It’s similar to talking in the world of currency.

CEE Currencies

Okay, let’s break it down. “CEE” is a simple term for Central and Eastern Europe.

Now, imagine that Central and Eastern Europe includes a number of countries in the middle, the Baltics, the east, and the southeast (the Balkans). Consider it a team that was part of the Eastern Union during the Warsaw Pact (political and military alliance) time.

The OECD (Organization for Economic Co-operation and Development) now refers to Central and Eastern European Countries (CEECs) as a “cool” group. Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, Slovenia, and the three Baltic States—Estonia, Latvia, and Lithuania—are all in.

Let us now take a look at the forex market. Here is the pick. You should be aware of the four major currencies in Central and Eastern Europe. Cool, right? We are getting the hang of this!

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BRIICS

Let us talk about BRIICS. Brazil, Russia, India, Indonesia, China, and South Africa form some kind of superhero squad.

Initially, it was simply “BRIC” – Brazil, Russia, India, and China. Goldman Sachs, the big thinkers, stated, “These guys are going places!” They named them “the BRICs.”

Then the OECD (Organization for Economic Co-operation and Development) stepped in and said, “Wait, let’s add Indonesia and South Africa to the crew.” BRIICS was born, with six nations engaging in a world of rising economies. It’s like having a powerful team of economic superheroes! Cool, right?

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BRICS+

Let me break it down into simpler terms. So, at the BRICS Summit in September 2023, they decided to expand the group even more, naming it BRICS+. The crew now includes six new people from Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. They will formally become full members in January 2024.

Now, what’s the big deal? Well, the new BRICS+ squad will be huge. including 46% of the world’s population and around 37% of global GDP. Imagine growing your team to tackle even more tasks on a worldwide scale. It’s very fantastic news!

Summary

Let’s simplify this

Currency Pairs:

Imagine you have two different forms of money. A currency pair indicates how much a particular currency is valued in comparison to another. Consider how the British pound compares to the US dollar.

Major currency pairs (or “Majors”):

These are the most popular money pairs that include the US dollar. People trade them a lot because they are valuable. Examples include EUR/USD, USD/JPY, GBP/USD, and a few others.

Currency crosses (or “crosses”):

Imagine money pairs that do not include the US dollar. These are known as currency crosses. Examples include EUR/GBP or EUR/JPY.

Total number of currencies:

There are many different types of money in the world, with approximately 180 recognised by prominent people. So, if you consider matching each type with every other type, you obtain a large number of possible pairs. But not all of them are used a lot in trading.