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. 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.
- Forex markets are used to trade exchange rates between two or more national currencies.
- All trading within the forex market, whether selling, buying, or trading, will take place through currency pairs.
- The most common currency pairs often involve the US dollar or Euro, but may also show up among geographic neighbors like Australia and New Zealand.
What are Currency Pairs
Currency pairs are the national currencies from two countries coupled for trading on the foreign exchange (FX) marketplace. Both currencies will have exchange rates on which the trade will have its position basis. All trading within the forex market, whether selling, buying, or trading, will take place through currency pairs.
In general, the eight most traded currencies (in no specific order) are the U.S. dollar (USD), the Canadian dollar (CAD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the New Zealand dollar (NZD), the Australian dollar (AUD) and the Japanese yen (JPY).
Nearly any nation's currency may trade, but some currencies pair more frequently than other money. All of the primary currency pairs contain the USD. There are many major currency pairs within the forex market around the world. As an example, some of the most common currency pairs outside of the Eurodollar are:
- USD/JPY. This currency pair sets the US dollar against the Japanese Yen.
- USD/GBP. This currency pair sets the US dollar against the United Kingdom pound and is commonly referred to as the pound-dollar.
- USD/CHF. This currency pair sets the US dollar against the Switzerland currency. It is referred to as the dollar swissy.
- USD/CAD. This currency pair sets the US dollar against the Canadian dollar. It is referred to as the dollar-loonie.
- AUD/USD. This currency pair sets the US dollar against the Australian dollar and is referred to as the Aussie dollar.
- NZD/USD. This currency pair sets the currency of New Zealand against the US dollar, and it is referred to as the kiwi dollar.
There are also currency pairs that do not trade against the US dollar, which have the name cross-currency pairs. Common cross currency pairs involve the euro and the Japanese yen.
The Most Commonly Traded Currency Pairs in the Forex Market by Volume
Currencies must be traded in pairs. Mathematically, there are 27 different currency pairs that can be derived from just eight currencies alone. However, there are about 18 currency pairs that are conventionally quoted by forex market makers as a result of their overall liquidity. These pairs are:
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.