Forex Currency Pairs
August 15, 2023
The Forex market is the biggest and most lucrative market; it is 24 hours 5 days a week market which is available worldwide. One of the most fascinating things about forex is to use leverage. Using margin trade, you would be able to borrow money from the broker and multiply your profit. The idea of making a profit in a quick and fast way resulted in the immense popularity of Forex trading. Getting into the market, you will encounter many terminologies, including currency pairs. This article will discuss currency pairs to help you open your first position. As you know, it’s possible to trade gold, crude oil, currencies, cryptocurrencies, commodities and many other investment materials on forex, but international currencies are the most popular asset to invest in.
Table of Contents
What is Forex Trading?
Before diving into the introduction of currency pairs, you need to understand how forex works. When trading on forex, you will simultaneously buy one currency and sell the other. The exchange would take place on a trading platform provided by a Forex broker or CFD provider, as you are supposed to simultaneously exchange one currency for the other one. You will be trading in pairs, a combination of two currencies. In forex, a currency is quotas in relation to another currency, for example, the Japanese Yen and the US dollar JPY/USD.
Read more: Forex Trading platforms
What is the currency pair?
As previously noted, the currency pair is the quotation of two different currencies, in which the value of one currency is quoted against the other. The first currency in a currency pair is called the base currency, and the second one is called the quote correctly.
To put it simply currency pairs work as a comparison device in forex. The value of one currency is compared to another, the base currency or the first currency in the pair versus the second one or the quote currency.
When choosing a currency pair, you’re speculating on how much of the quote currency is needed to purchase one unit of the base. In the previously mentioned example of Japanese Yen and US dollar, you’re actually speculating how many dollars you have to pay to buy one Japanese Yen.
A three-letter alphabetic code identifies each currency and which is called the ISO currency code. In the above example, the ISO currency code of the Japanese Yen will be JPY, and the ISO currency code of the US dollar will be USD.
How to read a currency pair
As previously mentioned, currency pairs consist of two separate currencies; the first one or the base currency, is the currency you are like to buy, and the second currency or the quote currency, is a currency you’re willing to pay.
Note that in real forex trading, you’re not buying an actual currency pair. In fact, you’re not buying any currencies; you’re just making speculating on price movement. So, the base currency is what a trader is buying effectively, and the second currency or the quote currency is the one they are selling against.
For every currency pair in the Forex market, you will find a price which determines the cost to purchase the base currency.
Consider the following example to learn how to read a currency pair before opening a position in forex:
- Consider the USD/JPY currency path; the bid price is 1.2055, and the asking price is 1.2 057, which means you can buy 1.2055 USD for 1.2057 Japanese Yen.
The first price is called the bid, and the second one is the asking price; the bid price is the amount of money a trader would pay for a currency, and the asking price is what a trader is willing to sell.
As you have noticed, there is a difference between the bid and ask price, which is called the bid-ask spread.
So, when you purchase a currency pair, you buy the base currency and sell the quote currency.
On the other hand, when you sell the currency pairs, you sell the base currency and buy the quote currency.
As you can see, every decision you may consider in opening a position in Forest trading directly affects the base currency
How to buy a currency pair
In theory, buying a currency pair is not different from Buying a stock. While in the stock market, you will pay a currency in exchange for a share of a business or a commodity; in forex, you will buy one currency in exchange for another. There are three types of currency pairs on the market:
Major currency pairs
One of the most common features of every major currency pair in the Forex market is that they all include the US dollar. There major popular currency pairs are as follows:
- EUR/ USD
- GBP/ USD
- USD/ JPY
- USD/ CHF
- USD/ CAD
- AUD/ USD
- NZD/ USD
As you can see, the US dollar is present in all the above currency pairs because it is the most heavily traded currency on the market. Amount of US dollar traded currency pairs in 2019, or 88% of the US dollar, followed by the Euro with 32 percent of transactions, and the Japanese Yen is in the third position with 17%.
Crosses currency pairs
Crosses currency pairs or minor currency pairs are the ones that do not include the US dollar. As the most traded currency is not present in this type of currency pair, they are considered less liquid than major pairs, and you might need to pay bigger spreads:
- EUR/ GBP
- GBP/ JPY
- CHF/ JPY
- GBP/ CAD
- NZD/ JPY
Read more: Forex Trading Terminology
Exotics currency pairs
In the third category of currency pairs, you will find pairs that consist of one major currency and one currency for many emerging markets. By emerging Markets, we refer to a developing economy like Singapore or South Africa.
- EUR/ TRY
- GBP/ ZAR
- NZD/ SGD
- USD/ HKD
These types of currency pairs are even less liquid, and spreads are significantly bigger. As exotic currencies are less liquid, they are more sensitive s to economic and geopolitical events and are more volatile.
There are 10 currencies heavily traded in the market, which belongs to divorce most powerful economies. These are as follows:
- USD/ United States/ dollar
- Euro/ European Union
- GBP/ United Kingdom/ pound
- JPY/ Japan/Yen
- AUD/ Australia/ dollar
- NZD/ New Zealand/ dollar
- CAD/ Canada/ dollar
- CHF/ Switzerland/ franc
- NOK/ Norway/ krone
- SEK/ Sweden/ krona
- DKK/ Denmark/ krone
Scandinavian countries are located in Northern Europe and are historically, culturally and linguistically connected; these countries have a similar root; Denmark, Norway, and Sweden are considered Scandinavian countries. Their currencies are referred to as “Scandies “.
“CEE” stands for Central and Eastern Europe.
Currencies of the countries in Central Europe, the Baltics, Eastern Europe, and Southeast Europe are called Cee currencies, which refer to the currency of Albania, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Slovak Republic, Romania, Slovenia, Estonia, Latvia, and Lithonia.
BRIICS is for six major developing countries: Brazil, Russia, India, China, Indonesia and South Africa.
How to trade currency pairs?
You might enter the forest market for various reasons, including speculation, international affairs, tourism, and hedge fund risk.
In order to open a successful position and sorry you have to use Technical and fundamental analysis just like any other Market, and making a profit in forex takes a fair amount of discipline.
When studying technical analysis, you study the past movement in price to speculate the future price action. You can use your different resources and tools to conduct a thorough technical analysis. There are support and resistant levels where buyers have stepped in and pushed up the prices or left them okay and shrunk them.
Unlike technical analysis, when fundamentally analyzing the market, you will always use a country’s economic data to understand the value and power of its currency. In doing so, you will need to consider interest rates, inflation rates, debt, supply and demand, trade balance, and economic growth in a country to determine the future price movement of its currency.
Read more: Forex Profit Calculator
What determines the rate of currency pairs?
When trading forex, you are dealing with different countries from all around the world, and fundamentals that affect currency pairs can change overnight. Here we will discuss some of the most important factors that may affect the price of currency pairs:
The first factor to consider is the power of central banks to manipulate the interest rate. They can change the interest rate to maintain monetary and financial statements.
When the interest rate of the currency increases overnight, the demand for that currency increases as well. Because higher interest rates mean traders can benefit from higher yield relative to other currencies.
Economic data and new news reflect the performance of a nation’s economy. Data, including inflation rate, employment rate, across domestic products, retail sales, and others, will affect the currency’s price.
Every trade war, election, corruption scandal, and political change reflects the instability of a country’s economy and can affect the price of that economy hugely.
Read more: Forex Forecasts
Tips for trading currency pass
The first and most important thing is to consider that you will always need discipline and consistency. So, if you are new to the market, stick to your trading strategy and open a demo account before trading real money. In Aron Groups, we are providing you with demo accounts to help you test your strategy and feel the market before making your deposit and opening your first position. Even if you are a professional trader, you will benefit from a demo account just the same; let’s say you have a new strategy in your mind or a new market; in any way, you should test that market or strategy using a demo account before trading real money.
There are other considerations when choosing currency pairs, we will discuss in the following:
- As a new trader, choosing liquid currency pairs like EUR/USD is best. Trading these types of pairs and analyzing the market using fundamentals and technical, you will get familiar with what drives the currency pairs.
- Be careful with leverage. It is the fascinating thing about forex trading, but as a beginner, be more careful with leverage because leverage has the power to multiply your profit or wipe out your account.
- Trading in forex without strategy is doomed to failure. Forex is about the market, which can trigger your emotions and result in hasty and emotional decisions. And when you’re trading on forex, you should always keep your emotions out of the equation; otherwise, you’ll make big mistakes by buying a currency pair at the wrong time or holding onto a position for longer than you intended.
The bottom line
Forex is the biggest and most unique market in the world, providing you with lots of opportunities for investment. But even experienced and professional traders need test strategies before applying them in a real trade. There are more than 180 currencies worldwide, but you will only find a broker that will provide you with some available currencies. In Aron Groups, you are provided with the best trading platforms in the market MetaTrader 5, a demo account, Aron Bank, Aron fund, and educational materials. Don’t hesitate to ask your question because our customer support is available 24/7 to help you open fruitful positions. As previously mentioned, as a beginner, it is recommended to stick with major currencies because they are less volatile and more predictable. Using this type of currency, you understand the nature of forex, and then you can move to other types of currency pairs, commodities, gold and cryptographies.