What are Currency Pairs? Your Ultimate Forex Guide

Last but certainly not least is the Japanese yen, another currency that has a long history of safe haven status. However, unlike the Canadian dollar or Australian dollar, the NZD isn’t typically tied to the fluctuations of one commodity. Despite the small size of New Zealand, the small island nation has an abundance of natural resources. However, the country’s significant agricultural presence is what attracts the “commodity currency” label. So as you might expect, just like oil exports heavily influence the Canadian dollar, the Australian dollar is at the mercy of the country’s gold exports.

The best currency pairs to trade, especially for beginners, are the majors. Compared to cross-currency and exotics pairs, their movements are somewhat more predictable. ‘Exotic’ currency pairs combine an emerging market currency with a more widely traded currency. If you buy a currency pair, you buy the base currency and implicitly sell the quoted currency. The bid (buy price) represents how much of the quote currency you need to get one unit of the base currency.

• When risk/volatility enters the market, traders bid up the Swiss Franc because the Swiss economy is seen to have lower risk.
• Traders enjoy tight bid-ask spreads on the GBP/USD due to its high liquidity.
• Using the above example, a currency trader would establish a position where they are simultaneously long the euro, and short the dollar.
• Most successful traders advise beginners to start with one pair and focus on that pair until you know it inside out.
• The US dollar versus the Canadian dollar is one of the more sensitive commodity currency pairs.

While very sensitive to any news regarding the US dollar, the GBP/USD has also proven to be significantly affected by political issues in both countries. This pair rose in popularity following the rapid development of South Korea in the 1960s. You should always check with the product provider to ensure that information provided is the most up to date. A currency is a form of money, usually issued by the public authorities in a particular…

Understanding Currency Pairs

A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. Major currency pairs (or just majors) are those that include the U.S. dollar. EURUSD, USDJPY, GBPUSD, USDCHF, USDCAD, AUDUSD, and NZDUSD are all majors. Remember that the foreign exchange market is the most liquid financial market in the world, so even some of the less popular currencies are extremely liquid. This is my favorite part because now we get to dig into the various classifications of currency pairs.

If you are starting to trade currencies in the Forex market, you are likely confused by all of the symbols and quotes blurring around on your screen. If you have done some research you would have seen the term pairs and wondered to yourself what on earth is a currency pair? When you trade in the forex market, you buy or sell in currency pairs. There are HUNDREDS of currency pairs in existence but not all can be traded in the FX market.

Thus, due to their high spread transaction cost and corresponding lack of technical discoverability, most exotic currency pairs are not profitable to trade. Crosses that involve forex pin bar any of the major currencies are also known as minors. Brokerages usually raise the spread they receive as compensation for their service instead of a transaction fee.

• These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded.
• Exotic currency pairs consist of one major currency and one currency from an emerging market, such as Brazil, Mexico, or South Africa.
• In the stock market, you can either buy (and sometimes sell) shares of stock.
• All of the major currency pairs have very liquid markets that trade 24 hours a day every business day, and they have very narrow spreads.
• The change in value between two currencies is expressed through a unit of measurement known as a pip.

There are essentially two ways in which any currency pair can move higher or lower. For both the EURUSD and the GBPUSD, the US dollar is the quote currency. By process of elimination, you know that the quote currency is the one that comes second in a pairing. I’ll also share my favorite pairs to trade, and which ones to avoid. Forex trading is an exciting market that offers tradable currencies the chance to react to changes quickly through a Forex trading platform. In the 21st century, the pound has continued to trend downward, ranging from a high of $2.08 to a present value just above $1.08.

Central banks may step in to control the price, but typically only when it is necessary to prevent the price from rising or falling so much that it could cause economic harm. High volume also means that traders can enter and exit the market with ease, with large position sizes. In lower volume pairs it may be more difficult to sell or buy a large position without causing the price to move significantly. Samples of these formats are GBP/AUD, EUR/USD, USD/JPY, GBPJPY, EURNZD, and EURCHF. The quote currency is the second currency listed in a forex pair and is used as the reference against the base. The base currency is the currency you are selling when you trade a Forex pair.

The ask—also called the offer—is the price that the broker will sell you the base currency in exchange for the quote or counter currency. When you buy a currency pair from a forex broker, you buy the base currency and sell the quote currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. I’m referring to the well-known fact that everyone wants to trade the major currency pairs regardless of what the price action looks like at any given time. Some traders are lured into the exotics because of their foreign sex appeal. You might consider yourself a “worldly” person and should trade an international market.

Cross pairs

As such, it has relatively tight spreads, though they are a little wider than the EUR/USD. While much forex trading happens within the space of a single trading day, it’s possible to hold a currency pair for days, weeks, months, or even years. Typically, you can find currency pairs by opening how to trade s&p 500 the broker’s app or website, and using a search bar. You’ll be prompted to enter the amount you’d like to purchase, and how you want to trade. Since emerging market currencies are less widely traded and are hence less liquid, these pairs usually come with a comparatively wide bid-ask spread.

The Complete Forex Currency Pairs Guide (2023 Update)

The currency pairs that do not involve USD[9] are called cross currency pairs, such as GBP/JPY. Pairs that involve the euro are often called euro crosses, such as EUR/GBP. Due to the overall lower degree of liquidity, exotic currency pairs tend to be far more sensitive to economic and geopolitical events. Don’t confuse minor currency pairs with the seven major currency pairs, all of which include the U. Dollar against one of the seven other most liquid currencies in the world. These currency pairs are based on a list of popular currencies that are paired with USD.

Major currency pairs all have extremely high market liquidity.The graph below illustrates the global currency exchange turnover by currency pair. Trading currency pairs is conducted in the foreign exchange market, also known as the forex market. This market allows for the buying, selling, exchanging, and speculation of currencies. It also enables the conversion of currencies for international trade and investment. The forex market is open 24 hours a day, five days a week (including most holidays), and sees a huge amount of trading volume.

Drawbacks to Trading the Crosses:

Because the CAD is our quote currency in USDCAD (remember, it’s the second in the pairing), the currency pair has an inverse correlation to oil. For those who have always traded the majors and crosses, the ability to view historical data is something you’ve come to expect. And while the liquidity of the exotic pairs is more than enough to absorb most orders, the “thin” what is sector rotation order flow often leads to choppy price action. The key to successful trading lies in selecting one or two pairs of currencies that you wish to trade as a beginner. As you gain confidence, you may wish to add more pairs in your trading portfolio. But for a new trader or investor it is always advised to trade with a limited number of pairs just to ensure simplicity.

The currency pairs serve to set the value of one vs. another, and the exchange rates will continuously fluctuate based on the respective changing values. Currency pairs are quoted based on their bid (buy) and ask prices (sell). The bid price is the price that the forex broker will buy the base currency from you in exchange for the quote or counter currency.

Another important thing that you need to keep in mind is that the above seven major pairs tend to respond to technical analysis very well. This might be due to the high liquidity of these pairs which makes them more market efficient and price discovery more ideal. During the Great Recession, the value of the British pound fell sharply. In the approximately five years following the Great Recession, the British pound recovered to trade around 1.6 against the U.S. dollar. GBP/USD is the third-largest trading pair, accounting for about 11% of the total forex market as of 2023. Trading the GBP/USD currency pair is also known as trading the „cable.”

What is currency pair?

For example, if you sell the EURUSD and buy the USDCHF, you have essentially doubled your risk. For example, under normal circumstances, the EURUSD and the USDCHF are negatively correlated. In other words, if the EURUSD ends the day higher by 100 pips, chances are the USDCHF finished the day lower.

Due to their commodity-based economies, trading volumes in the USD/CAD, AUD/USD, and NZD/USD will often exceed those in the USD/CHF, and sometimes the GBP/USD. In our example, USD is considered the base currency, and CAD is the quote currency. Thus, Johnny is able to exchange $1.3 of CAD per $1 of USD at the currency exchange store.