Currency Pairs
A currency pair is a set of two currencies and its quotation determines the value of one currency against the other. So in Forex, you don’t trade just one currency; you trade two currencies against each other. The first currency in the pair is called the base currency and the second currency is called the counter currency.
A currency pair is a set of two currencies and its quotation determines the value of one currency against the other
How to Read a Currency Quote?
The simplest way to read a currency quote is from left to right. Let’s look at the EUR/USD currency pair, which is also the most traded in the Forex market. In this pair, The Euro (EUR) is the base currency, and the US dollar (USD) is the counter currency. Let’s assume the EUR/USD price is trading at 1.1700; in this case, one euro is equal to 1.1700 US dollars, or in other words, 1.1700 US dollars are required to purchase one euro. Let’s use the USD/CAD pair as an example once more. If the USD/CAD exchange rate is 1.3200, one US dollar equals 1.3200 Canadian dollars, or in other words, 1.3200 Canadian dollars are required to buy one US dollar.
Although a currency pair is made
up of two currencies, it functions as a single unit. It simply behaves like a
commodity or stock. You earn when the price of the stock rises and lose
when the price of the stock falls.
types of currency pairs
There are mainly three types of currency pairs that are major, cross and exotic currency pairs. The currency pairs are largely categorized based on their trading volume. The EUR/USD is by far the most traded currency pair in the world. The majority of the trade takes place in major currency pairs. However, the cross-currency pairs also provide sufficient liquidity. In recent past the, trading in exotic currency pairs has also gained huge popularity.
The EUR/USD is the most traded currency pair in the world.
major currency pairs
In the Forex market, the major currency pairs are the seven most traded currency pairs. These pairs have the highest trading volume and all of them include the US dollar either as a counter or quote currency. They have the highest liquidity and low trading spreads which results in minimal trading costs.
These major currency pairs are EUR/USD, GBP/USD, AUD/USD, NZD/USD, USD/CHF, USD/JPY, and USD/CAD.
Cross Currency Pairs are those pairs that do not have the US dollar, such a GBP/CAD, CAD/JPY, EUR/JPY, and so on. In comparison to major currency pairs, cross-currency pairs have lesser market liquidity and wide dealing spreads. However, despite that cross currency pairs provide high-probability trading opportunities.
cross currency pairs
exotic currency pairs
Exotic currency pairs are those pairs that include a major currency and a developing economy’s currency, such as USD/ZAR (US dollar vs South African Rand), EUR/TRY (Euro vs Turkish Lira), AUD/MXN (Australian Dollar vs Mexican Peso), and so on. Exotic pairs have lower liquidity and can be highly volatile. These pairs usually have high trading costs.