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You would never buy a house without understanding the mortgage, right? Yet when it comes to the Forex market, many traders forget to familiarize themselves with the currency pairs they’re buying and selling.
I’ll admit that trading currencies is quite different from purchasing a home, but the idea is the same – you need to understand where your money is going.
How do I know that many traders skip this step?
In addition to receiving hundreds of emails every month, I was once a beginner too.
Sure, I understood the very basics of currency pairs before I opened a live trading account, but I certainly didn’t know as much as I should have.
So to save you from making some of those same mistakes, I’ve put together a crazy-detailed lesson of everything you could want to know about Forex currency pairs.
My goal with this lesson is to take you from understanding the basics to becoming a complete currency guru. So whether you’ve been trading for two days or two years, I can all but guarantee that you’ll learn something new.
As always, be sure to leave a comment at the bottom of this post and don’t forget to share it with your friends.
Let’s get down to business!
Before we get into the nitty-gritty, it’s important that you understand what a currency pair is and how it moves.
As you might have guessed from its name, each pair involves two currencies. In this way, the value of one currency is compared to and is thus relative to the currency it’s paired against.
If that sounds confusing don’t worry, it will be abundantly clear by the time you finish this section.
The first currency in the pair is the “base currency” and the second is the “quote currency.”
This naming convention is the same regardless of the currency pair you’re trading.
You get the idea. Now let’s explore the two terms in greater detail.
The base currency is the one that is quoted first in a currency pair.
Using EURUSD as an example, the Euro would be the base currency. Similarly, the base currency of GBPUSD is the British pound (GBP).
By process of elimination, you know that the quote currency is the one that comes second in a pairing.
For both the EURUSD and the GBPUSD, the US dollar is the quote currency.
There are essentially two ways in which any currency pair can move higher or lower.
Because the Forex market never sleeps and thus currency values are always changing, both the base currency and quote currency are in a constant state of flux.
In our example, if the Euro (base currency) were to strengthen while the US dollar remained static, the EURUSD would rise. Conversely, if the Euro weakened the pair would fall, all things being equal.
If on the other hand, the US dollar (quote currency) were to strengthen, the EURUSD would fall. And if the USD weakened, the currency pair would rally as the Euro would gain relative strength against its US dollar pairing.
All of the hypotheticals above assume that nothing else has changed for the pair.
Here’s a visual of the relationship. In this instance, the Euro is strengthening against the US dollar.
Not surprisingly, the next example is the EURUSD in a bear market. Here the Euro is weakening against the US dollar.
Pretty simple, right?
If you’re already familiar with the content so far, don’t worry, we’ll be getting into more advanced territory shortly.
As you can imagine, the velocity of any move depends on the relationship between the two currencies. For instance, if one is strengthening while the other is weakening, the move will be more pronounced than if only one currency is on the move.
Last but not least, it’s important to remember that the relationship between the base and quote currency is always changing. So just because the EURUSD is rallying in the current session doesn’t mean it will be tomorrow or even one hour from now.
One area that often confuses traders is the idea of buying and selling currencies.
In the stock market, you can either buy (and sometimes sell) shares of stock. There are no pairings, and the value of one stock is not dependent on that of another.
However, in the Forex market, all currencies are paired together. So when you’re ready to place a trade, are you buying or selling?
The answer is both.
For example, if you sell the EURUSD (also referred to as going “short”), you are simultaneously selling the Euro and buying the US dollar.
Conversely, if you buy the EURUSD (also referred to as going “long”), you are buying the Euro and selling the US dollar.
If not, feel free to review this section as many times as necessary.
To clarify, this does not mean you have to place two orders if you want to buy or sell a currency pair.
As a retail trader, all you need to know is whether you want to go long or short. Your broker handles everything else behind the scenes.
There’s also only one price for each pair. Remember that a currency’s value depends on the currency sitting next to it.
Alright, so we’ve breezed through several terms and concepts when it comes to trading Forex currency pairs.
At this point, you should have a firm understanding of what a currency pair is as well as the dynamics of buying and selling.
If not, feel free to review the material above as many times as necessary before moving on.
Now it’s time for the meat and potatoes of the lesson.
This is my favorite part because now we get to dig into the various classifications of currency pairs. And later, I’ll uncover the pairs that are affected by changing commodity prices as well as a few of the safe haven currencies.
Don’t know what those are?
No problem. By the time you finish this section, you’ll be a currency guru!
Ah, the majors. These currency pairs are to the Forex market what Apple and Amazon are to the stock market.
They are by far the most popular and therefore the most liquid.
|Currency Pair||Countries||Currency Name|
|EUR/USD||Eurozone / United States||Euro / US dollar|
|USD/JPY||United States / Japan||US dollar / Japanese yen|
|GBP/USD||United Kingdom / United States||British pound (sterling) / US dollar|
|USD/CHF||United States / Switzerland||US dollar / Swiss franc|
|USD/CAD||United States / Canada||US dollar / Canadian dollar|
|AUD/USD||Australia / United States||Australia dollar / US dollar|
|NZD/USD||New Zealand / United States||New Zealand dollar / US dollar|
Notice a trend?
Every major currency pair includes the US dollar. So if you ever see a pair that doesn’t involve the USD, it isn’t a major.
Everyone wants to trade the major pairs listed above. Mostly because, well, they’re the most popular, and who doesn’t want to put their money in the most traditional assets?
But here’s the thing…
The majors are not the end all be all when it comes to trading Forex.
It’s important to remember that there are dozens of pairs at your disposal.
While it is true that these are the most traded and are therefore the most liquid, popularity doesn’t pay the bills, favorable setups do. And unless your trading account is the size of Warren Buffett’s bank account, you don’t need the majors.
What in the heck am I talking about, you ask?
I’m referring to the well-known fact that everyone wants to trade the major currency pairs regardless of what the price action looks like at any given time.
For example, if the EURUSD has been choppy for weeks and isn’t producing anything favorable, you’re probably better off looking elsewhere.
But instead what I see quite often are folks trying to force trades on the EURUSD, GBPUSD, etc. simply because it’s what everyone else is doing.
This is one reason why I’m not an advocate of mastering one or two currency pairs at a time. In fact, making this mistake can quickly lead to forcing trades and overtrading.
I’ll expand on this idea shortly.
So if the major pairs include the US dollar, we can infer that minor currency pairs are those that do not include the US dollar.
Pretty straight forward, right?
Now, here’s where some traders get confused. The truth is, there are far more currency crosses than there are minor pairs.
A lot of folks make the mistake of thinking that a minor to be any pair that doesn’t include the US dollar.
This is false.
A currency cross is any pair that doesn’t include the US dollar.
Minor currency pairs, on the other hand, make up a fraction of the crosses that are available for trading.
In other words, all minors are crosses, but not all crosses are minors.
Let’s define these two terms before we go on.
It’s time to clear up some confusion I see quite often around the web regarding minor pairs and currency crosses.
A currency cross is any pair that does not include the US dollar. As such, these pairings don’t offer nearly as much liquidity as the majors we discussed earlier.
A minor pair, on the other hand, is a major currency cross. As you now know, a cross doesn’t include the US dollar. Therefore, these minors are comprised of the Euro (EUR), British pound (GBP) and the Japanese yen (JPY).
If it’s all a little fuzzy at the moment, don’t worry. The tables below should help to clear things up.
|Currency Pair||Countries||Currency Name|
|EUR/GBP||Eurozone / United Kingdom||Euro / British pound (sterling)|
|EUR/AUD||Eurozone / Australia||Euro / Australian dollar|
|EUR/NZD||Eurozone / New Zealand||Euro / New Zealand dollar|
|EUR/CAD||Eurozone / Canada||Euro / Canadian dollar|
|EUR/CHF||Eurozone / Switzerland||Euro / Swiss franc|
|Currency Pair||Countries||Currency Name|
|EUR/JPY||Eurozone / Japan||Euro / Japanese yen|
|GBP/JPY||United Kingdom / Japan||British pound (sterling) / Japanese yen|
|AUD/JPY||Australia / Japan||Australian dollar / Japanese yen|
|NZD/JPY||New Zealand / Japan||New Zealand dollar / Japanese yen|
|CAD/JPY||Canada / Japan||Canadian dollar / Japanese yen|
|CHF/JPY||Switzerland / Japan||Swiss franc / Japanese yen|
|Currency Pair||Countries||Currency Name|
|GBP/AUD||United Kingdom / Australia||British pound (sterling) / Australian dollar|
|GBP/NZD||United Kingdom / New Zealand||British pound (sterling) / New Zealand dollar|
|GBP/CAD||United Kingdom / Canada||British pound (sterling) / Canadian dollar|
|GBP/CHF||United Kingdom / Switzerland||British pound (sterling) / Swiss franc|
|Currency Pair||Countries||Currency Name|
|AUD/NZD||Australia / New Zealand||Australian dollar / New Zealand dollar|
|AUD/CAD||Australia / Canada||Australian dollar / Canadian dollar|
|AUD/CHF||Australia / Switzerland||Australian dollar / Swiss franc|
|NZD/CAD||New Zealand / Canada||New Zealand dollar / Canadian dollar|
|NZD/CHF||New Zealand / Switzerland||New Zealand dollar / Swiss franc|
|CAD/CHF||Canada / Switzerland||Canadian dollar / Swiss franc|
But if the major currency pairs get most of the attention and carry the most liquidity, why would anyone want to trade minor currency pairs and especially crosses?
Make no mistake, while the daily volume for these crosses is less than the majors, they are certainly not illiquid by any means.
In fact, many of the major crosses average more daily volume than some stock exchanges.
Remember that the foreign exchange market is the most liquid financial market in the world, so even some of the less popular currencies are extremely liquid.
The exotic currency pairs are the least traded in the Forex market and are therefore less liquid than even the crosses we just discussed.
And while the liquidity of the exotic pairs is more than enough to absorb most orders, the “thin” order flow often leads to choppy price action.
Additionally, the technical analysis we like to use here at Daily Price Action is less reliable. As a general rule of thumb, the more liquid a market is, the more you can rely on the technicals.
So what are these exotic currency pairs, you ask?
|AED||UAE Dirham||ARS||Argentinean Peso|
|AFN||Afghanistan Afghani||GEL||Georgian Lari|
|MYR||Malaysian Ringgit||AMD||Armenian Dram|
|GYD||Guyanese Dollar||MZN||Mozambique new Metical|
|AWG||Aruban Florin||IDR||Indonesian Rupiah|
|OMR||Omani Rial||AZN||Azerbaijan New Manat|
|IQD||Iraqi Dinar||QAR||Qatari Rial|
|BHD||Bahraini Dinar||IRR||Iranian Rial|
|SLL||Sierra Leone Leone||BWP||Botswana Pula|
|JOD||Jordanian Dinar||TJS||Tajikistani Somoni|
|BYR||Belarusian Ruble||KGS||Kyrgyzstanian Som|
|TMT||Turkmenistan new Manat||CDF||Congolese Franc|
|LBP||Lebanese Pound||TZS||Tanzanian Schilling|
|DZD||Algerian Dinar||LRD||Liberian Dollar|
|UZS||Uzbekistan Som||EGP||Egyptian Pound|
|MAD||Moroccan Dirham||WST||Samoan Tala|
|EEK||Estonian Kroon||MNT||Mongolian Tugrik|
|MWK||Malawi Kwacha||ETB||Ethiopian Birr|
|THB||Thai Baht||TRY||New Turkish Lira|
|ZAR||South African Rand||ZWD||Zimbabwe Dollar|
|BRL||Brazilian Real||CLP||Chilean Peso|
|CNY||Chinese Yuan Renminbi||CZK||Czech Koruna|
|HKD||Hong Kong Dollar||HUF||Hungarian Forint|
|ILS||Israeli Shekel||INR||Indian Rupee|
|ISK||Icelandic Krona||KRW||South Korean Won|
|KWD||Kuwaiti Dinar||MXN||Mexican Peso|
|PHP||Philippine Peso||PKR||Pakistani Rupee|
|PLN||Polish Zloty||RUB||Russian Ruble|
|SAR||Saudi Arabian Riyal||SGD||Singaporean Dollar|
While the table above is fairly comprehensive, it is by no means a complete listing of every exotic currency in the world. However, it does cover some of the most popular of the less popular exotics.
But before you rush off to add this basket of currencies to your trading platform, there are a few things you should know.
As I mentioned earlier, these Forex exotics are less liquid than their more standard counterparts. And while most of them can easily support the majority of retail orders, the lack of volume can adversely affect the spread between the bid and the ask.
Also, in my experience, the study of technical analysis works best in highly liquid markets. This is one reason why I made the transition from equities to Forex in 2007.
Because the exotic currency pairs lack sufficient liquidity, at least compared to that of other pairs, the accuracy of technical analysis can suffer. So even if you find a pair that has a favorable spread, the lower volume may adversely affect your trading performance.
At least two or three times a week I scan back several years on a particular currency pair. This is especially true if I’m on the fence about a key support or resistance level.
For those who have always traded the majors and crosses, the ability to view historical data is something you’ve come to expect.
However, if you trade the exotics listed above, you may not have that luxury.
Some of these currencies simply haven’t been around long enough to establish a significant track record.
In other cases, your broker may not offer the data. Remember that these exotics are far less popular than even the crosses, so some brokers decide that storing and updating the data simply isn’t worth their resources.
This is perhaps the number one reason I avoid most exotic currency pairs like the plague.
While you may be able to find a few that have favorable movement, for the most part, they are extremely choppy and volatile currencies to trade.
Here’s an example of ZARJPY. As you know from the currency tables above, that’s the South African rand versus the Japanese yen.
As you can see, the price action above is less than ideal. And keep in mind that the ZARJPY is relatively “mild” in terms of the chop you might see on any given day.
Last but certainly not least is the opportunity cost associated with trading exotic currency pairs.
What does this mean, exactly?
It means that if you were to take a trade on the EURTRY (Euro / Turkish Lira), you’re tying up a portion of your capital that could be used elsewhere. You now have a level of exposure that you didn’t have 5 minutes ago.
As such, you are now somewhat limited in what you can do should a favorable setup arise on a more liquid pair such as the EURUSD or the USDCAD.
Of course, you could make the same case about any position, but with dozens of other currency pairs at your disposal, you certainly have to weigh the opportunity cost associated with trading a less liquid market.
As the name implies, commodity currencies are those that rely on their respective country’s export activities.
Developing countries such as Burundi and Tanzania are among them. However, it also applies to countries such as Canada, Australia, and New Zealand.
Although there are several others on the list, the only commodity currency pairs that you need to know for this lesson are USDCAD, AUDUSD, and NZDUSD.
You should know that the Canadian, Australian and New Zealand dollar are also known as the commodity dollars, or “comdolls.”
Let’s take a look at each pair in detail.
The US dollar versus the Canadian dollar is one of the more sensitive commodity currency pairs. This sensitivity is due to the vast amount of natural resources that flow from Canada, much of which makes its way to the United States.
Among these natural resources is oil, which is a primary export for Canada and one that is vital to the health of the global economy.
In fact, Canada exports over 2 million barrels a day to the US alone. This high dependency on the commodity as an export makes the Canadian dollar vulnerable to fluctuations in the price of oil.
Although the correlation is never static, over the last ten to fifteen years, the Canadian dollar has held a positive correlation to oil of more than 75% on average.
This relationship means that when oil rises the Canadian dollar strengthens. Conversely, when oil depreciates so too does the CAD.
Because the CAD is our quote currency in USDCAD (remember, it’s the second in the pairing), the currency pair has an inverse correlation to oil.
Australia is one of the world’s largest exporters of gold. In fact, as of 2014 the country was the second largest gold producer only second to China.
Here’s a chart showing how the Aussie dollar has tracked gold prices over time.
So as you might expect, just like oil exports heavily influence the Canadian dollar, the Australian dollar is at the mercy of the country’s gold exports.
Why does this matter?
It matters because investors tend to flock to gold during times of economic unrest. And if the Australian dollar tracks gold prices, then there’s a good chance that the Aussie will also capitulate during hard economic times.
But if this is true, why did the AUDUSD plummet during the 2008 global financial crisis?
That’s a great question, and we find the answer once we dig into the “safe haven” status that the US dollar often brings to the table.
During times of economic uncertainty or struggle, investors tend to favor the US dollar. So even though the Aussie was riding the gold wave at the time (which wasn’t very impressive as you’ll see below), the US dollar was strengthening at a faster pace.
The Australian dollar also tends to track equities, so when these markets began to capitulate back in 2008 so too did the AUD.
Remember, all value is relative in the currency market.
Despite the small size of New Zealand, the small island nation has an abundance of natural resources. However, the country’s significant agricultural presence is what attracts the “commodity currency” label.
These resources combined with the massive international trade and it’s little wonder why the New Zealand dollar is affected by global commodity prices.
However, unlike the Canadian dollar or Australian dollar, the NZD isn’t typically tied to the fluctuations of one commodity.
Rather, the currency is affected by a basket of commodities and is one of the top exporters of milk, meat, and fruits.
A safe haven is any asset that has a strong likelihood of retaining its value or even increasing in value during market downturns.
One of the most popular safe havens is in the form of a metal rather than a currency. But contrary to popular belief, gold isn’t a great performer during economic uncertainty or even recessionary periods.
During the 2008 global crisis, for example, gold was locked into a range and really only managed to move sideways with slight gains seen towards the end of the recession.
Note: The gray area represents the unofficial start and end of the 2008 crisis
Of course, as you can see from the chart above, the longer-term appreciation of gold as a safe haven can be quite considerable and should therefore not be underestimated.
In the Forex market, the Swiss franc (CHF) is considered a safe haven currency, hence the reason the USDCHF experienced mixed results during the 2008 period.
Notice how although the US dollar gained against the franc in late 2008, the results weren’t nearly as substantial or lasting as something like the AUDUSD chart above or any one of the yen pairings below.
The US dollar often enjoys the same “safety net” status, however, when matched up against a more formidable safe haven, the currency tends to move lower during times of economic unrest. The USDJPY chart below is a perfect example.
Remember that if the quote currency experiences heavy appreciation, the pair is likely to move lower over time.
Last but certainly not least is the Japanese yen, another currency that has a long history of safe haven status.
Notice how the yen crosses below fared during the 2008 meltdown.
As you can see, the Japanese yen appreciated massively against all three of its counterparts above.
Over the years the yen has been one of the more consistent safe haven currencies, which has made it my go-to currency when fear begins to grip global markets.
But just because an asset held its value or appreciated during the last market downturn does not mean it will behave in the same manner in the future.
The ever-changing nature of the financial markets doesn’t offer guarantees such as this. However, the assets mentioned above do have a history of retaining their value when things turn sour.
If you only remember one thing from this lesson, let this be it.
A currency pair’s correlation refers to the similarities shared by various pairings. These commonalities lead to both positive and negative associations.
For example, under normal circumstances, the EURUSD and the USDCHF are negatively correlated. In other words, if the EURUSD ends the day higher by 100 pips, chances are the USDCHF finished the day lower.
An example of two positively correlated pairs would be EURUSD and GBPUSD. In our previous example, if the EURUSD ends the session higher by 100 pips, it’s likely that GBPUSD also ended the day higher.
So you get the idea. Again, pretty basic stuff but yet essential knowledge if you wish you achieve consistent profits in the Forex market.
Why is it so important, you ask?
Because managing risk is your number one job as a trader. And if you aren’t familiar with these currency correlations, you can inadvertently double your risk.
For example, if you sell the EURUSD and buy the USDCHF, you have essentially doubled your risk.
At the same time, if you were to buy both currency pairs, you’ve contradicted yourself. For example, if you sell two negatively correlated pairs, chances are only one of the two trades will be successful.
So what is a Forex trader to do?
It comes down to checking the currency correlation before placing a trade.
Here is the currency correlation table I use.
What’s nice about the chart above is that it’s divided into various time frames. This separation makes it easy to determine how one currency pair correlates to another and if you’re approach makes sense from a risk to reward perspective.
Just kidding, it isn’t really top secret. But I will say that this is the first time I’ve publicly announced the currency pairs I trade.
Here you go!
So which pairs are my favorite to trade?
Honestly, I don’t have favorites. I’m an opportunist so rather than favoring particular currencies, I gravitate toward favorable technical patterns.
This is why you’ll often see me commenting on currency crosses over in the daily setups. I enjoy trading the majors, but I certainly don’t discriminate should a compelling setup arise on something less liquid.
With that said, the pairs I started with back in 2007 are highlighted in the table above. These were my go-to currency pairs back then, and many still are today with a particular emphasis on the AUDUSD and the NZDUSD.
Wow, this lesson is now over 4,000 words. Who knew someone could write so much about Forex currency pairs?
But seriously, I’ve always said that the process of becoming a great Forex trader is more important than the destination. And if you want to become consistently profitable, it’s essential that you understand everything there is to know about the currency pairs you’re trading.
Many traders make the mistake of skipping these necessary steps before putting their hard-earned money at risk.
As they say, knowledge is power. And nothing is more powerful for a trader than understanding the currency pairs that make up the Forex market.
I sincerely hope this lesson has answered any question you may have had. As always, if I missed something, please let me know in the comments section below.
What currency pairs do you trade? Did I miss anything?
I’d love to hear from you so be sure to drop me a line in the comments section below. I always make it a point to respond.
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