Forex trading is the practice of exchanging one currency for another. This exchange is made with the intention of re-exchanging the currencies when the exchange rate has shifted. If you were to use Great British pounds to buy Canadian dollars, you would be hoping that the dollar increased in value so that when you bought back your pounds, you would be able to purchase more than you spent to buy the dollars.
Forex trades always involve two different currencies. The two currencies used for a trade are known as a forex pair. Usually, forex pairs feature currencies from two major, stable markets, one of which is the US.
The most commonly traded currencies are known as major pairs. These pairs are available to trade through virtually any online forex broker. They are by far the most popular forex currencies, accounting for approximately 80% of all forex trades.
Though major forex pairs account for the majority of forex activity, traders are theoretically able to trade just about any two currencies. That is, assuming the forex broker they trade with has the pair as an available option.
Some forex brokers will only have major pairs available. Others will have what is known as minor and exotic pairs.
An exotic forex pair includes at least one currency from a developing or economically unstable country. It can be paired with another minor currency or a currency from a developed economic country.
Exotic pairs are not offered by all forex brokers. Different brokers will have different markets on offer, and the breadth of those offers are something you should consider when selecting the broker you will create an account with.
Between major and exotic forex pairs are minor pairs. This type of pair includes US dollars and a less stable currency that’s not included among the major seven partners.
There’s no objectively ‘best’ type of forex pair between major, minor and exotic. But each type of pair does have unique characteristics you should be aware of.
Exotic forex pairs tend to be more volatile than most. While this can make them risky, it also makes them potentially lucrative.
Another thing to consider for trading exotic pairs is that they sometimes have larger spreads than major pairs. In essence, the ‘fee’ for trading these pairs may be larger than that of a major or minor pair.