Forex Currency Pairs
Understanding the concept of currencies is necessary to stay profitable in forex. Learn the key concepts of forex currency pairs, their types, and features.
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You may hear of forex trading, but are you aware of its basics. In this article, we will have a detailed study of forex currency pairs with examples. It will help you in making your trade decision effectively.
What is traded in forex?
Currency or money is traded in forex. Currency can be in the form of paper or coins used as a medium of exchange issued by the central government of the respective country.
The main aim behind issuing currency is to provide citizens with a centralized system of exchange to buy or sell goods and services within a particular geographical area.
Apart from using currencies as a medium of exchange, one can also make money by trading or investing in currencies.
Trading in currencies is quite similar to stock trading. The major difference is in the stock market, you invest money in a company’s stock, while in the forex, in countries’ currencies.
Currency is the representation of a country. The stronger the financial health, the stronger the currency, and vice versa.
Based on economic, political, geopolitical, financial, and social status, there are eight major, powerful, or strongest currencies in the world that dominate the forex market.
It includes United States Dollars, Great Britain Pounds, the Euro of the Eurozone, Japanese Yen, Switzerland Franc, Canadian Dollars, Australian Dollars, and New Zealand Dollars.
What are currency pairs?
A currency pair is the combination of currencies of two nations. The value of one currency is expressed against another currency in currency pair.
It takes two to tango. The same is true with the forex market; to buy one currency, you have to sell another currency.
Similar to the barter system, where one commodity is exchanged for another in the forex market, one currency is exchanged for another.
In the barter system, a person has to give tons of wheat to buy some gold. Similarly, every currency has a different value based on the demand and supply.
How to read currency pairs
Forex currency pairs represent the value of one currency against another. In the forex market, currencies are represented in a three-letter code like USD, EUR, GBP, etc.
In currency code, the first two letters represent the country, and the last represents the currency, for example, in CAD. CA is for Canada, and D is for Dollars.
Let us look at the currency pairs example and how to read them. Suppose you are dealing with CAD/NZD.
The first currency of a currency pair is the base currency, and the second is the quote currency.
In the above example, CAD is the base currency, and NZD is the quote currency. The value of the quote currency is measured against the base currency.
Suppose the current exchange rate of this pair is 1.24. It means 1 CAD is equal to 1.24 NZD.
While trading in this pair, if you believe that the value of CAD (base currency) will rise against NZD, you will buy this pair, and if you believe it will fall, you will sell the pair.
Types of Currency Pairs
Currency Pairs in Forex are divided into three parts in the forex market. A novice trader needs to have a clear understanding of each type to choose the right pair.
Let us have a detailed study of forex currency pair types with examples and key features.
Major Currency Pairs
These are the most used and traded pairs, including the US Dollar and any other of the seven major currencies.
The US Dollar is the strongest forex currency, and 88% of transactions occur in USD, followed by the Euro with 32% and Japanese Yen with 17%. Meanwhile, 75% of all transactions occur in major pairs.
That’s why major pairs are considered the best for beginners or novice traders, as they offer high liquidity, great volatility, and tight spreads. There are seven major currency pairs. Let’s have a look at these pair with their countries.
Minor Currency Pairs
These are also known as cross-currency pairs made up of two major currencies. However, these pairs do not include US Dollars.
The market condition is not as good as the major pairs. However, both currencies are powerful, so these can be a suitable choice for some traders as pairs offer good liquidity.
A good understanding of the market and currency pairs you are trading is important while dealing with such pairs.
AUD/JPY, NZD/JPY, CAD/JPY, EUR/AUD, EUR/NZD, GBP/AUD, GBP/NZDAUD/NZD, GBP/CHF, GBP /CHF, AUD/CHF, NZD/CHF are some example of cross currency pairs.
Exotic Pairs
As the name suggests, exotic pairs are for adventurous traders or risk lovers. These pairs are the riskiest with unpredictable market conditions.
These can include one major currency and one currency of developing nations like Iran, India, Brazil, Turkey, China, and Pakistan, or they can also include both the currencies of emerging nations.
Exocitc pair offer lower liquidity, volatility, and instability as these are very sensitive to changes like political turmoils, wars, diplomatic tensions, and economic instability.
A trader should always remain prepared for unexpected market conditions as the currencies are of underdeveloped and developing nations. So, these are not as strong as the major pairs.
US Dollars and Hong Kong Dollars, Euro and Saudi Arabia Riyal, Japanese Yen and Singapore Dollars, Great Britain Pounds and Thailand Baht, Russian Rubel and Singapore Dollars, UAE Dirham and Afganistan Afgani are examples of exotic pairs.
Conclusion
Currencies are the basis of forex trading. Knowledge of forex currency pairs and factors like spreads, time frames, volatility, and liquidity is essential.
It will help you identify the right trading pairs based on your needs and increase the chances of your success. Learning is a way to stand out from the crowd.
If you buy and sell currency pairs based on guesswork or instinct, then it is no less than gambling.
As we have studied, there are more than 180 legal currencies and many pairs in the market, and not all the pairs are profitable; some are very risky. So, make sure you are aware of the market condition of the currency pair you are trading in.
