Forex currency pairs are the foundation of trading. They facilitate trade by providing a measurement tool for potential profit and loss when exchanging currencies, but what is a currency pair and why is it so fundamental to currency trading?
Back to Basics
At a basic level, Forex trading is the action of purchasing and selling one currency for another. Putting these two together makes up the currency pair.
Currencies continuously rise and fall in value over time and so Brokers will aim to make a profit from the movement in foreign exchange rates by buying or selling accordingly when they speculate one currency will strengthen or weaken in value against another.
Examining Currency Pairs
Currency pairs are used to judge the fluctuations in these values, one currency is used as a reference point to inform decisions on whether to buy or sell the currency in question.
If you look at any Forex quote, all currencies are quoted in pairs. For example, EUR/USD and USD/GBP etc. The currency listed before the slash is the base currency (the currency you intend to buy or sell), and the quote currency placed after the slash (the price you pay to buy one unit of the base currency).
For example, let’s say the GBP/USD is trading at a market value of 1.2560, the base currency is GBP and the quote currency is USD. To buy 1 unit of the base currency (GBP) the trader would have to pay 1.2560 of the quote currency (USD).
Conversely, if the trader wanted to sell 1 unit of the base currency (GBP) they would receive 1.2560 of the quote currency (USD).
In this case, the traders would buy Great British Pounds if they speculate that it would increase in value relative to the US Dollar, also known as “going long the pair”. Whereas they would sell the GBP if they thought that the value of the GBP will go down relative to the USD, this is known as “going short the pair”.
What Are The Majors?
There are many currency pairs for traders to choose from, but the most commonly traded pairs on the Forex are the majors. All 8 of these currencies feature the USD as either the base or the quote currency and are considered the most liquid and widely traded currencies in the world. The most commonly traded currency is the EUR/USD, accounting for 30% of all daily Forex trades.
These popular currency pairs are:
- EUR/ USD – Euro/United States
- USD/ JPY – United States/ Japan
- GBP/USD – United Kingdom/ United States
- USD/CHF – United States/ Switzerland
- USD/CAD – United States/ Canada
- AUD/USD – Australia/ United States
- NZD/USD – New Zealand/ United States
The currency pairs that don’t contain the USD are known as cross-currency or crosses.
Traditionally USD would act as the base for all conversion rates, to set an exchange rate a currency would need to be converted into USD and then converted into the desired unit. The most actively traded crosses are formed from 3 major non-USD currencies, EUR, JPY and GBP. These are widely known as “minors”.
Exotic currency pairs are formed when one major currency is paired with a smaller currency of an emerging market, such as Mexico, Russia and South Africa. These pairs lack liquidity and are often more expensive to trade on the market.
Examples of these currencies are:
- TRY – Turkish lira
- SEK – Swedish krona
- NOK – Norwegian krone
- DKK – Danish krone
- ZAR – South African Rand
- SGD – Singapore dollar
- HKD – Hong Kong dollar
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