There are a few terms for the different currencies you can trade which are the majors, minors and exotics and the better you understand the differences the easier it will be to trade them. The majors include 8 currencies
Currently, you do have a few extra currencies rising in dominance such as the CNY but it is still seen as an exotic currency as it is not yet fully convertible. Obviously, when you look at the list of currencies, these are not always the biggest countries or the strongest economies but it is based on the convertibility as well as use as global currency reserve and even correlations to important commodities such as the AUD or CAD.
Currencies such as the GBP and CHF may not come from the largest countries but their involvement in the world of finance and use of currency reserves.
USD Rules all Currencies
Every trader should know the basic principle that the USD is the most important currency and you will need an in-depth knowledge of how this affects the forex market. The USD is known as the reserve currency of the world and it is held in substantial quantities by other governments as part of their foreign exchange reserves. This use to be the GBP but after Nixon removed the gold standard from then on the USD took the position due to the size of its economy, military power and it was one of the few countries not devastated by WW1.
Due to this, you will find that the USD will be one of the major driving factors for currency movements. One of the benefits of this is that USD will be in demand around the world to pay off debts so the more currency is held outside the US the USD will usually strengthen. But this also has a drawback when people outside the US do not want to hold it. This can lead to USD flooding back into the country, weakening it, and causing inflation at the same time.
'Safe' or 'Risk' Currencies
Many traders would have heard the term flights to safety or into risk assets so do these apply to the currency market or are they only describing other products? For a few reasons, the market does tend to judge some as safe and other as risky. The safe currencies include USD, EUR, CHF and even JPY since these are seen as the most stable countries, with large governments behind them. CHF is a slightly stranger case as it is seen as one of the main safe currencies even with a mall government and economy but this is due to historical perceptions as Switzerland is often portrayed as the world's bank. These currencies have lost some stability more recently such as the CHF due to the Swiss National Bank decision which wreaked havoc on the markets and bankrupted more than one forex company. Risk currencies can be seen as emerging market, these can be great currencies to trade when the market is booming and when the economy is contracting you will see a flight to safety away from these currencies.
Which Pairs are Most Liquid?
One important factor when deciding what to trade and how much risk to take on is the liquidity for that specific currency pair. When trading the major crosses, you will find that there is much greater liquidity so the intraday movements will be seen be more smooth compared to an exotic currency pair. The smaller the liquidity, the more likely the entry and exit trades will be slipped meaning you will get out at a slightly worse price.
When are you Trading?
The time of the day can create completely different trading environments for the same currency pairs and the liquidity can be also be affected by the time of day. If you are trading a pair such as GBPEUR at 3am GMT, you will find that the liquidity is smaller as the UK and Europe are sleeping and there are fewer trades in the market. You will find a similar position trading one of the Asian currencies during the New York session although there can still be heavy trading in the UK and US in many currencies as these are the largest 2 trading hubs for FX in the world. This can also be the case as one of the larger factors affecting the rates are economic releases and government statements which do not take place out of hours.