Money Matters | How Currency Pairs Work (2024)

FAQs

Money Matters | How Currency Pairs Work? ›

Currency pairs compare the value of one currency to another—the base currency (or the first one) versus the second or the quote currency. It indicates how much of the quote currency is needed to purchase one unit of the base currency.

A currency pair is a quotation of two different currencies, where one is quoted against the other. The first listed currency within a currency pair is called the base, while the second currency that is the benchmark is called the quote.

A pip is the smallest whole unit measurement of the difference between the bid and ask spread in a foreign exchange quote. A pip equals 1/100 of 1%, or .0001.

What is currency correlation in forex? A currency correlation in forex is a positive or negative relationship between two separate currency pairs. A positive correlation means that two currency pairs move in tandem, and a negative correlation means that they move in opposite directions.

A typical currency pair listing may appear as, EUR/USD 1.3045. In this example, the euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency. The difference between the two currencies is a ratio price. In the example, one euro will trade for 1.3045 U.S. dollars.

Due to the large size of the forex market, it is less susceptible to insider trading than some other markets, particularly for major currency pairs. However, it is still sometimes subject to market manipulation.

With a chart, it is easy to identify and analyze a currency pair's movements, patterns, and tendencies. On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis.

Understanding 20 Pips

If you are trading the most common currency pairs, such as EUR/USD or GBP/USD, a 20-pip move equates to a change of 0.0020 or 0.20%. It might not sound like much, but in forex, small price changes can lead to significant profits or losses depending on your trading position size.

For example, some forex pairs move 100 pips per day on average, allowing traders to profit from the movement. If a trader even makes 10 pips per day daily, it can result in significant profit, based on the number of lots traded.

This stop-loss equates to 50 pips. The last step depends on what lot size is being traded. A standard lot refers to 100,000 units of base currency and equates to $10 per pip movement. A mini lot is 10,000 units of base currency and equates to $1 per pip movement.

What is the best currency pair to trade for beginners? ›

Beginners might find the AUD/USD pair to be an excellent choice, since it is more predictable and less likely to spike or drop suddenly. In many studies, this pair has also been cited as one of the least volatile. In conclusion, the best currency pairs to trade for beginners are EUR/USD, GBP/USD, USD/JPY.

What currency pairs should you trade? The EUR / USD is actually the best currency to trade, its the most liquid and cheap to trade and most of the moves are quite logical in a way, the EURUSD currency pair often has a negative correlation with USD / CHF and a positive correlation with GBP / USD.

Using an economic calendar

By analyzing consensus forecasts and historical results, traders can anticipate potential market reactions and make informed decisions. Additionally, understanding the correlations between economic data and currency movements helps traders navigate the complexities of major currency pairs.

If you are buying a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive (i.e. USD/JPY) and you will earn interest as a result. Conversely, if the interest rate differential is negative then you will have to pay.

Knowing when to buy and sell forex depends on many factors, such as market opening times and your FX trading strategy. Many traders agree that the best time to buy and sell currency is generally when the market is most active – when liquidity and volatility are high.

The major currency pairs on the forex market are the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. The four major currency pairs are some of the most actively traded pairs in the world, along with the so-called commodity currency pairs: USD/CAD, AUD/USD, and NZD/USD.

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.

You would buy the pair if you expected the base currency to strengthen against the quote currency, and you would sell if you expected it to do the opposite. The price of a forex pair is how much one unit of the base currency is worth in the quote currency.