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Currency Pairs: Overview, What They are, How They Work

currency pair

Key points

Forex trading requires an understanding of currency pairings. The fundamentals of currency pairings are covered in this blog, covering large pairs like EUR/USD, minor pairs that don’t include the US dollar, and unusual pairs from developing economies. Discover the significance of bid and ask prices, the operation of the base and quote currencies, and the fluctuations in exchange rates. Learn which pairings are most often traded, what influences their value, and how to make wise trading selections. Go deeper to improve your trading approach and understand the currency market.

Introduction

If you are to trade in the forex market, you must understand currency pairs. A currency pair is a quotation of two different currencies, one quoted in terms of the other. The first one is the base currency and the second is the quote currency. This simple guide will help you learn the very basics of currency trading.

What are Currency Pairs?

A currency pair is the quotation of two different countries’ currencies in the foreign exchange market. That’s just a way of saying that the currency’s value is compared to another currency’s value. In the foreign exchange market, you buy and sell one currency against another. That is what a currency pair is.

It is expressed as a symbol, e.g. EUR/USD, whereby the first currency in the symbol is the base currency and the latter is the quote currency. The rate at which the two currencies exchange translates to the value of the trade.

Understanding currency pairs

The Forex market is the market where people buy and sell various currencies in order to do international trade and investing. It is open 24/7, 5 days a week.

When you trade currencies, you are constantly in the business of buying and selling the currency. If you buy a currency pair, you are buying the first currency, called the base currency, and selling the second one, called the quote currency.

The price at which you pay for the base currency is known as the bid price. This is the amount of quote currency you need to obtain one unit of the base currency.

On the other hand, if you are selling a currency pair, you are disposing of the base currency in exchange for the quote currency. The price at which you will sell is an amount of quote currency you will receive for one unit of the base currency.

Therefore, with currency trading, one practically sells one currency to purchase another. This is so that an individual can leverage the changes in value of different currencies to make a gain out of it.

How Currency Pairs Work

There is constant fluctuation in the exchange rate of two currencies. That is because a variety of factors may influence how much one currency is worth in relation to another. In essence, you are comparing the values of different currencies when you exchange them. When trading EUR/USD, for instance, you compare the value of the US dollar vis-à-vis the value of the euro.

Here, the quote currency is the US dollar, and the base currency is the euro. Since the exchange rate is similar to a price ratio, one euro is equivalent to 1.3045 US dollars. That is to say, for every euro you buy, you will get 1.3045 US dollars.

You are either buying one currency against another or selling when you exchange currencies. You expect that when you buy a currency pair, the value of the currency will go up. If you sell a pair of currencies, you expect the value of the currency to decline. A pip is the unit of measurement to express changes in currency exchange rates. It is a percentage point.

Common Currency Pairs

Many currencies can be traded in the foreign exchange market, but some are more popular than others. Most of the major currency pairs include the US dollar (USD). Here are some common currency pairs that you might come across:

  • USD/JPY: This is the US dollar against the Japanese yen.
USD/JPYEURIUSDUSD/CHFGBP/USDUSD/CADAUD/USDNZD/USDEURJJYEURIGBP
1 week-0.230.22-0.210.07-0.220.070.14-0.20
1 month0.63-0.52-0.35-0.580.460.640.890.77
3 month-0.620.52-0.62-0.40-0.300.090.24-0.35
6 month-0.620.780.140.43-0.70-0.630.58-0.68
1 year-0.690.74-0.510.67-0.69-0.690.09-0.20
  • USD/GBP: This is the US dollar against the British pound (also known as the pound-dollar).
EBP/USDEUR/USDUSD/JPYUSD/CHFUSD/CADAUD/USDNZD/USDEUR/JPYEUR/GBP
1 week0.94-0.21-0.95-0.900.940.870.880.64
1 month0.13-0.13-0.24-0.260.310.20-0.10-0.39
3 month0.83-0.62-0.790.210.700.490.410.26
6 month0.310.14-0.070.17-0.02-0.160.49-0.45
1 year0.88-0.51-0.87-0.890.870.860.69-0.45
  • USD/CHF: This is the US dollar against the Swiss franc (also known as the “dollar swissy”).
USD/CHFEURIUSDUSD/JPYGBP/USDUSD/CADAUD/USDNZD/USDEURJPYEUR/GBP
1 week-1.000.22-0.950.98-0.99-0.95-0.93-0.83
1 month-0.98-0.52-0.240.89-0.93-0.94-0.87-0.79
3 month-0.920.52-0.790.14-0.78-0.57-0.62-0.67
month-0.850.78-0.070.66-0.88-0.860.06-0.74
1 year-0.980.74-0.870.96-0.98-0.98-0.58-0.01
  • USD/CAD: This is the US dollar against the Canadian dollar (also known as the “dollar-loonie”).
USD/CADEUR/USDUSD/JPYUSD/CHFGBPIUSDAUD/USDNZD/USDEURJJPEUR/GBP
1 week-0.980.070.98-0.90-0.98-0.98-0.97-0.88
1 month-0.89-0.580.89-0.26-0.96-0.96-0.83-0.70
3 month0.14-0.400.140.21-0.41-0.56-023-0.02
6 month-0.350.430.660.17-0.83-0.770.16-0.45
1 year-0.930.670.96-0.89-0.97-0.96-0.590.13
  • AUD/USD: This is the Australian dollar against the US dollar (also known as the “Aussie dollar”).
AUD/USDEUR/USDUSD/JPYUSD/CHFGBP/USDUSD/CADNZD/USDEURJJYEURIGBP
1 week0.98-0.22-0.990.94-0.980.950.920.83
1 month0.900.46-0.930.31-0.960.940.760.67
3 month0.63-0.30-0.780.70-0.410.870.480.28
6 month0.61-0.70-0.88-0.02-0.830.91-0.230.58
1 year0.95-0.69-0.980.87-0.970.990.59-0.0
  • NZD/USD: This is the New Zealand dollar against the US dollar (also known as the “kiwi dollar”).
NZD/USDEURJUSDUSD/JPYUSD/CHFGBPIUSDUSD/CADAUD/USDEURJJYEURJGBP
1 week0.930.07-0.950.87-0.980.950.980.83
1 month0.960.64-0.940.20-0.960.940.900.79
3 month0.420.09-0.570.49-0.560.870.610.17
6 month0.65-0.63-0.86-0.16-0.770.91-0.090.72
1 year0.96-0.63-0.980.86-0.960.990.610.00

These are just a few examples of popular currency pairs that you might see in the foreign exchange market.

Major Currency Pairs

The most traded pair is EUR/USD, or, in other words, the euro in relation to the US dollar: 1 euro = 1.25 US dollars. This is the most liquid pair traded.

Because there are so many currencies in the world, there are also just as many currency pairs. Based on their activity per day, currency pairs are categorized.

The most commonly traded currency pairs that involve the US dollar are:

  • EUR/USD (Euro vs. US dollar)
  • USD/JPY (US dollar vs. Japanese yen)
  • GBP/USD (British pound vs. US dollar)
  • USD/CHF (US dollar vs. Swiss franc)
  • AUD/USD (Australian dollar vs. US dollar)
  • USD/CAD (US dollar vs. Canadian dollar)

These currency pairs are called “major currencies” because they are the most widely traded. The markets for these currencies are open 24 hours daily from Monday to Thursday, except for Sunday night and Friday evening at 5 pm US Eastern time. 

The last two pairs, AUD/USD and USD/CAD, are special because they are affected by the prices of commodities like oil and metals.

Minor Currency Pairs

A “minor currency” or “cross” currency is when a currency pair does not include the US dollar. It’s in such pairs that there is a decent market, even though they are not traded that widely. Quite frequently, the pairs that trade the most volume are between the currencies that are already the major players.

For example:

  • EUR/GBP
  • GBP/JPY
  • EUR/CHF

In these pairs, the liquidity is not as large as in the major ones, yet there still is a good market.

Exotic Currency Pairs

Exotic currency pairs involve currencies from emerging markets, like countries that are not as developed. These pairs are not as liquid and have wider spreads, which means the prices can be more unpredictable.

An example of an exotic currency pair is:

USD/SGD (US dollar vs. Singapore dollar)

These pairs are not as well-known and have less trading activity, making them more risky to trade.

Best currency pair for forex trading

The best currency pairs to trade in forex rely on a number of variables, such as market conditions, trading style, and risk tolerance. The following well-liked and often traded currency pairs in forex accommodate various trading styles:

  • EUR/USD (Euro/US Dollar): One of the most traded currency pairs worldwide, EUR/USD is renowned for its liquidity and reduced spreads. It is appropriate for both novice and seasoned traders.
  • US Dollar/Japanese Yen, or USD/JPY: Traders seeking a pair with less volatility tend to select USD/JPY since it is frequently characterized by stability and liquidity. Both American and Japanese economic policies have an impact on it.
  • British pound/US dollar, or GBP/USD: GBP/USD is known for its volatility, making it appealing to traders seeking more significant price movements. Economic events in both the United Kingdom and the United States influence this pair.
  • AUD/USD: Given Australia’s focus on commodity exports, traders with an interest in commodities frequently select AUD/USD. The state of the world economy and the price of commodities have an impact on this pair.
  • US Dollar/Canadian Dollar, or USD/CAD: For traders seeking exposure to currencies linked to commodities, USD/CAD is a popular choice, driven by factors such as oil prices and economic circumstances in the US and Canada.

Conclusion

A part of the forex world that plays a very crucial role is currency pairs. A knowledge of how currency pairs work, the base and quote currencies, bid and ask prices, and the exchange rate being applied is actually key for trading successfully. The most traded and the most liquid markets are these major currency pairs, like EUR/USD and USD/JPY. The other types of currency pairs are minors and exotics. Minors offer less liquid markets with wider spreads, while exotics are not very liquid. Understanding the basic differences between these kinds of currency pairs would help you make wise choices with trading in order to reach your goals.

FAQs

What is a currency pair?

A currency pair is a quotation of two different currencies, one of which is quoted against the other.

What are the main currency pairs?

The most traded currency pairs that include the US dollar are EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD.

What are minor currency pairs?

The smaller currency pairs do not include the US dollar and are less frequently traded than the major currency pairs.

What are exotic currency pairs?

Exotic currency pairs contain emerging currencies and have lower trading volume, which makes trading them riskier.

What is the difference between bid price and sale price?

The bid price is the price you pay for the base currency, while the ask price is the price you get when you sell the base currency.

What is a pip in forex trading?

A pip is a percentage unit of measurement used to express changes in exchange rates.

How to trade currency pairs?

You can trade currency pairs by buying or selling one currency against another, hoping to take advantage of changes in the value of different currencies.

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