Foreign currency (forex) trading is simple in the sense that like in stock market, all the forex trader has to do is to buy and sell currency at the right time to earn profits and avoid as much losses as possible. However, forex trading is difficult in the sense that unlike stocks, currencies are subject to more external and internal factors that may either raise or lower their price. One of the most peculiar features of forex trading is that currencies must be paired into currency pairs.
Currency pairs are quotations of the values of one currency against another. Having the reference currency called the quote currency and the other one called the base currency, currency pairs become very handy especially in forex trading.
While the stock market only allows a trader to choose the stocks to trade from a defined list, the forex market allows a trader to choose currencies, create combinations, and trade them. It is true that a trader can pair any currency with another to form currency pairs. In fact, with almost a hundred and fifty listed currencies around the world, a trader, mathematically, will have a lot of possible combinations, giving him a lot of opportunities to earn profit easily. However, because of the nature of currencies, combinations formed may or may not earn profit. This means that pairs formed may or may not do well because of external forces surrounding them.
Though there is no established rule in forming combinations, forex trading practice has developed “The Majors.” The latter term refers to the foreign currencies that are most frequently traded around the world. This is because these currencies are widely known for their high liquidity or their ability to easily convert their assets into cash to pay off current liabilities.
The currencies referred to as the Majors are the US Dollar (USD), Euro (EUR), Japanese Yen (JPY), Swiss Franc (CHF), Great British Pound (GBP), and the Australian Dollar (AUD).
This means that if a currency is one of the Majors, it is one which is mostly traded in the forex market. It must be noted, however, that once a major currency is paired, its nature will relatively depend on the currency at which it is referred. For instance, the nature of a EUR/USD pair is different from a USD/CAD or a EUR/NZF, even if their quote currencies are the US dollar and the Euro, respectively.
As such, research and reading must be done before pairing currencies, as the strength or weakness of a pair is merely dictated by the currencies at which they are referred or based.