There are two main ways to trade currencies: spot FX and CFDs.
Spot FX is the method we’ve been covering so far – trading the quote currency for the base. CFD trading, meanwhile, works a little bit differently.
You’re still speculating on the price movements of currency pairs. But instead of buying and selling the quote and the base, you’re trading a contract that mirrors the price of the pair.
We’ll cover CFDs in more detail in the Trading with Leverage course.
Currency pairs
Currency pairs are traditionally divided into three groups related to their popularity and liquidity: majors, minors, and exotics.
Majors
Majors are the most actively traded currencies, constituting about 85% of the total FX volume. They typically cost less to trade than minor currency pairs, because they are bought and sold so much.
The major pairs are:
AUD/USD – the Australian dollar vs the US dollar
EUR/USD – the euro vs the US dollar
USD/CHF – the US dollar vs the Swiss franc
GBP/USD – British pound sterling vs the US dollar
USD/JPY – the US dollar vs the Japanese yen
USD/CAD – the US dollar vs the Canadian dollar
USD/CHF – the US dollar vs the Swiss franc
EUR/USD, though, is the biggest by far – some 28% of all forex trades are on euro-dollar alone. The major currency pairs all include the US dollar (USD).
Minors
While the major currency pairs make up most of the market, you shouldn’t ignore the minors – also referred to as cross-currency pairs. These are made up of all the other combinations of major markets, such as EUR/JPY, AUD/NZD, and EUR/GBP.
Spreads for minor currency pairs are often wider because there are fewer people buying and selling them in the market at any given time.
Exotics
Exotic currency pairs feature less popular currencies and are traded less frequently or in lower volumes. Due to these low volumes, exotics are illiquid and can be more expensive to trade. Many view exotic currency pairs as having higher risk profiles compared to commonly traded currencies.
A good rule of thumb, if you’re new to forex, is to focus on one or two currency pairs. Generally, traders will choose to trade EUR/USD, USD/JPY , or GBP/USD because there is so much information and resources available about the underlying economies involved.