How do currency pairs work, and what are the differences between major, minor, and exotic pairs?
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Currency pairs are used in forex trading to show how much of one currency is needed to purchase another. Major pairs involve the most traded currencies like the USD and EUR, minor pairs have less common currencies, and exotic pairs include a major currency paired with a currency from a developing country, making them more volatile and less liquid.
Currency pairs represent the value of one currency relative to another, with a base currency and a quote currency. They are classified into major pairs (involving widely traded currencies like the USD), minor pairs (cross currencies excluding the USD), and exotic pairs (a major currency paired with a smaller economy's currency). Each category varies in liquidity, spreads, and volatility.
Currency pairs consist of two currencies, with the first as the base currency and the second as the quote currency. For example, in EUR/USD, the euro is the base and the U.S. dollar is the quote.
Major Pairs: Involve the U.S. dollar and are highly traded, like EUR/USD and USD/JPY, with high liquidity and tight spreads.
Minor Pairs: Exclude the U.S. dollar but include other major currencies, such as GBP/JPY, with lower liquidity.
Exotic Pairs: Combine a major currency with a currency from a developing economy, like USD/TRY, typically featuring wider spreads and higher volatility.