A currency pair is a combination of two different currencies, used to express their relative value with respect to each other. For example, EURUSD is a currency pair, and so is GBPUSD. The first one shows us the price of 1 Euro in terms of Dollars, while the latter expresses the price of one pound sterling in Dollars. Any two currencies can be formulated into a currency pair, but the largest in terms of volume are pairs within these 8 currencies (also known as major currencies); USD (United States Dollar), EUR (European euro), GBP (Great British pound), JPY (Japanese yen), AUD (Australian Dollar), NZD (New Zealand Dollar), CAD (Canadian Dollar), and CHF (Swiss Franc).
The first currency listed in a currency pair is called base currency, while the second one is the quote currency, nevertheless a currency pair functions as one singular financial instrument that can be bought or sold at any time. When we are buying a currency pair, we simultaneously buy the base currency while selling the quote currency, anticipating an appreciation of the base currency against the second currency. For example, when buying EURUSD at a price of 1.2000
(1.2 $/€), we are buying the euro while selling the Dollar. If the price of EURUSD goes above 1.2000, we make profit, because the euro is now more expensive relative to the Dollar (e.g 1.2050 $/€). When we sell a currency pair, we are simultaneously buying the quote currency while selling the base currency, and the decrease in price of said currency pair will produce profits.
Currency pairs are dissected into different categories. Major pairs consist of all currency pairs that quote the US Dollar against one of the other 7 currencies mentioned above. These currency pairs account for most of the volume traded daily in the foreing exchange market. Trading high volume currency pairs is beneficial for traders due to a few reasons. With additional volume, spreads between the bid and ask price tend to tighten, which implies a lower cost of entry when trading major pairs. Secondly there is a lower probability of slippage, due to the availability of countless buyers and sellers that participate in the market all the time. Even when slippage occurs, it is often less severe when dealing with major currency pairs.
Minor pairs, also known as cross-currency pairs are all combinations of the 8 currencies mentioned above, excluding the US Dollar, such as GBPCAD, EURGBP, NZDJPY and many others. Exotic pairs are currency pairs where a major currency is matched with the currency of a developing country, strong economically but less significant than the countries with major currencies. Some exotic pairs are EURTRY ( euro against the Turkish lira), USDSGD (US Dollar against the Singapore Dollar). Due to lower volume, a higher cost is attached to trading minor and exotic currency pairs, compared to major pairs, however if a trader is making the right decisions when participating in the foreign exchange market, the choice of currency pairs will have an insignificant impact on his profitability.