Forex trading can prove to be confusing for some traders,
not just because of the process per se but also because of its other
components, one of which are the currency pairs.
There are numerous currency pairs being offered in the forex
market. You only have to choose which one you would like to trade and you can
begin. You’ll just have to initially determine how much of the base currency you
would actually want to buy and how much quote currency you would need to obtain
the amount desired.
Without further ado, let’s now discuss what exactly a
currency pair is.
What is a Currency Pair
Currency pairs are the quotation and pricing structures of
the currencies that you get to trade in the forex market. Currencies undergo a
process that will help determine their value in comparison to that of another
currency. The values of the currencies are shown as rates.
As for the structure of a currency pair, the first listed
currency pair is known as the base currency while the second currency is called
the quote currency. The currency pair will tell you how much quote currency you’ll
need in order to purchase one unit of the base currency.
All forex trades involve the buying and selling of both
currencies in a pair at the same time. Note that there are as many currency
pairs as there are currencies in the world.
Types of Currency Pairs
There are 3 types of currency pairs found in the forex
market. These are the major currency pairs, minor currency pairs, and the
exotic currency pairs.
Major Currency Pairs
These pairs all have the U.S. dollar (USD) on one side and
are the most frequently traded. All of the major currency pairs have extremely
liquid markets and trades 24 hours a day every business day. They also have
narrow spreads.
Major currency pairs are basically treated in the forex
market the way Apple and Amazon are treated in the stock market. They are by
far the most popular, hence the liquidity.
These pairs include:
EUR/USD
GBP/USD
USD/JPY
USD/CHF
AUD/USD
USD/CAD
Minor Currency Pairs
These are currency pairs that do not include the U.S. dollar
in any way. Minor currency pairs are also referred to as cross-currency pairs.
These pairs include:
EUR/GBP
EUR/AUD
GBP/JPY
CHF/JPY
NZD/JPY
GBP/CAD
Exotic Currency Pairs
An exotic currency pair is a combination of a major currency
and the currency of a developing economy like Brazil or South Africa. They are
not as often found in the market as major and minor currency pairs which mean
that the spreads tend to be higher when trading them.
These currency pairs include:
EU/TRY
USD/HKD
JPY/NOK
GBP/ZAR
AUD/MXN
USD/SGD
Conclusion
Remember than when buying a currency pairs, you’re actually
buying the base currency while simultaneously selling the quote currency. So
you can and should treat currency pairs as one unit.
There are various factors that can affect the value of a
currency pair, one of the biggest factor is the economy. You should always stay
updated about the current events in order to make adjustments to your trades
and help keep you away from severe losses.
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