In the forex market, most traders use the US dollars on one side or another to execute trades. The rest of the currency pairs used in trades are crosses like EURCAD, AUDJPY, NZDJPY, and more. You can trade any two currencies against one another, but the primary forex market consists of specific pairs. Before you get into currency trading, it is best to know about the types of currency pairs in detail. You may visit reliable sources of financial advisory content like investdale.com for the latest news about trading, as well as for tips on currency trading.
The types of currency pairs you need to know about before you start trading are –
Highly liquid pairs
These are the majors. The most important and liquid pairs are EURUSD, GBPUSD, USDJPY, AUDUSD, EURGBP, and USDCAD.
Less liquid pairs
These pairs are important but less liquid. They are EURJPY, USDCHF, USDMXN, ZDUSD, EURCHF, and USDZAR.
These pairs are created by combining two major pairs. For example, AUDJPY is a combination of AUDUSD and USDJPY. Since they are not truly traded pairs, liquidity is not as good in the crosses. Note that some very popular crosses like AUDJPY and EURCAD do have some direct liquidity on some platforms. The common crosses are EURAUD, GBPJPY, EURCAD, AUDCAD, GBPCHF, AUDJPY, NZDJPY, CADJPY, and CADCHF.
These pairs are illiquid and are generally less fun and less profitable to trade because they generate higher transaction costs. As a short-term trader, you should stay away from these pairs. If you are taking a multiday view, you may find these pairs profitable at times but for most short-term currency traders, 90+% of profits come from the liquid pairs, not these. These pairs are USDRUB, USDSGD, EURSEK, EURNOK, EURPLN, USDTRY, USDCNH, AUDNZD, XAUUSD, NOKSEK, and EURCZK.
There are other currency pairs out there, but this list covers the ones you need to know about as a trader. Pairs like USDHKD and EURDKK, for example, offer close to zero profit potential because they are managed by central banks and exhibit extremely low volatility.
Any other currency pair can be triangulated from the pairs above. For example, there is no direct market for CHFSEK. So, if you want to buy that pair, you need to buy EURSEK and sell EURCHF in equal amounts. Some ECNs will offer liquidity in less liquid pairs like CADJPY but this liquidity is generally still triangulated from the primary pairs; in this case, USDCAD and USDJPY. So, if you trade CADJPY, you are essentially doing a USDCAD and a USDJPY trade. Note that primary forex pairs are much more liquid than the non-traded pairs. Therefore, you will notice your transaction costs are higher as you move out the spectrum, away from heavily traded primary pairs like EURUSD and USDJPY and towards tertiary, non-traded crosses like GBPNZD or CADNOK.
Is gold a currency?
You may have noticed in the earlier point that XAUUSD is included in the illiquid pairs. XAU is the three letter code for gold. Gold trades on EBS which is one of the large electronic FX brokerage systems; and is often considered a currency. There is debate around whether or not it is really a currency. However, if it is not a currency, it certainly comes close. The debate is mostly semantic. You can say gold is somewhere on the spectrum, a currency/commodity hybrid. For practical purposes, you can think of gold as an illiquid currency that can be crossed up against other currencies. XAUJPY or EURXAU are perfectly reasonable crosses to think about, although you will generally find that liquidity is so poor that they are not worth trading. It can be said that gold is an extremely important indicator but it is better to refrain from trading it because it behaves very differently than most currencies.
If you want to trade currency pairs, then take a look at the list of the most stable currencies throughout the years and also research the current market as financial events can affect price movements of currencies.