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 thebase currency, and the second currency is called thequote currency.
Currency pairs compare the value of one currency to another—the base currency (or the first one) versus the second or the quote currency. Itindicateshow much of the quote currency is needed to purchase one unit of the base currency. Currencies are identified by anISO currency code, or the three-letter alphabetic code they are associated with on the international market. So, for the U.S. dollar, the ISO code would be USD.
Key Takeaways
A currency pair is a price quote of the exchange rate for two different currencies traded in FX markets.
When an order is placed for a currency pair, the first listed currency or base currency is bought while the second listed currency in a currency pair or quote currency is sold.
The EUR/USD currency pair is considered the most liquid currency pair in the world. The USD/JPY is the second most popular currency pair in the world.
Trading currency pairs is conducted in theforeign exchange market, also known as the forex market. It is the largest and mostliquid marketin the financial world. 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.
All forex trades involve the simultaneous purchase of one currency and the sale of another, but the currency pair itself can be thought of as a single unit—an instrument that is bought or sold. 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.
Currency pairs are quoted based on theirbid(buy) andaskprices (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. 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 trading currencies, you're selling one currency to buy another. Conversely, when trading commodities or stocks, you're using cash to buy a unit of that commodity or a number ofshares of a particular stock. Economic data relating to currency pairs, such as interest rates and economic growth or gross domestic product (GDP), affect the prices of a trading pair.
Major Currency Pairs
A widely traded currency pair is theeuroagainst the U.S. dollar or shown asEUR/USD. In fact, it is the most liquid currency pair in the world because it is the most heavily traded.The quotation EUR/USD = 1.2500 means that one euro is exchanged for 1.2500 U.S. dollars. In this case, EUR is the base currency and USD is the quote currency (counter currency). This means that 1 euro can be exchanged for 1.25 U.S. dollars. Another way of looking at this is that it will cost you $125 to buy 100 euros.
There are as many currency pairs as there are currencies in the world. The total number of currency pairs that exist changes as currencies come and go. All currency pairs are categorized according to the volume that is traded on a daily basis for a pair.
The currencies that trade the most volume against the U.S. dollar are referred to as the major currencies, which include:
EUR/USD or the Euro vs. the U.S. dollar
USD/JPY or dollar vs. the Japenese yen
GBP/USD or the British pound vs. the dollar
USD/CHF or the Swiss franc vs. the dollar
AUD/USD or the Australian dollar vs. the U.S. dollar
USD/CAD or the Canadian dollar vs. the U.S. dollar
The final two currency pairs are known as commodity currencies because both Canada and Australia are rich in commodities and both countries are affected by their prices. The major currency pairs tend to have the most liquid markets and trade 24 hours a day Monday through Thursday. The currency markets open on Sunday night and close on Friday at 5 p.m. U.S. Eastern time.
Minors and Exotic Pairs
Currency pairs that are not associated with the U.S. dollar are referred to as minor currencies or crosses. These pairs have slightly wider spreads and are not as liquid as the majors, but they are sufficiently liquid markets nonetheless. The crosses that trade the most volume are among the currency pairs in which the individual currencies are also majors. Some examples of crosses include the EUR/GBP, GBP/JPY, and EUR/CHF.
Exotic currency pairs include currencies of emerging markets. These pairs are not as liquid, and the spreads are much wider. An example of an exotic currency pair is the USD/SGD (U.S. dollar/Singapore dollar).
If you pair one major trading currency against another and neither are US dollars, this is a “minor trading pair.” An example of this would be a pair between then Swiss Franc and the Euro. An exotic currency pair is a term used to describe the trading of a developing economy's currency with a major currency.
Trading minor pairs with T4Trade provides diversification in currency trading, and will allow you to discover opportunities that are beyond the traditional major currency pairs. Traders can trade EUR/GBP, AUD/JPY, and GBP/JPY to diversify their trading strategies and explore unique market dynamics.
Exotic currency pairs include currencies of emerging markets. These pairs are not as liquid, and the spreads are much wider. An example of an exotic currency pair is the USD/SGD (U.S. dollar/Singapore dollar). Bank for International Settlements.
FX majors are the most popular currency pairs on the market, with the largest trading volume and many fluctuations at a given moment. FX minors are less dynamic trading pairs with low liquidity and attractiveness among market participants.
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.
If you pair one major trading currency against another and neither are US dollars, this is a “minor trading pair.” An example of this would be a pair between then Swiss Franc and the Euro. An exotic currency pair is a term used to describe the trading of a developing economy's currency with a major currency.
The pattern for the minor scale starts a half step plus a whole step lower than the major scale pattern, so a relative minor is always three half steps lower than its relative major. For example, C minor has the same key signature as E flat major, since E flat is a minor third higher than C.
Pros and Cons of Trading Forex Exotic Currency Pairs
All things being equal, a market with higher liquidity is more open to a trader than a less liquid one. Specific circ*mstances may make exotics pairs an attractive proposition though. They may offer exposures that you can't get elsewhere, or quite in the same way.
Notable currency pairs that move the most pips daily include AUD/JPY, AUD/USD, CAD/JPY, NZD/JPY, GBP/AUD, USD/MXN, USD/TRY, and USD/ZAR. Among highly liquid pairs, EUR/USD and GBP/USD lead the pack, moving between 70 to 120 pips daily.
Beginner traders should gravitate towards forex pairs for small account trading like EUR/USD, GBP/USD, USD/JPY, USD/CHF, and AUD/USD, recognized for their regular trading volumes and tempered market fluctuations.
Gold (XAU) is traded against the US dollar (USD), and its price represents the cost of one ounce of gold in USD. XAU/USD is traded on the forex marketplace like any traditional currency pair.
An exotic currency is a type of currency that isn't widely traded because of high volatility and limited liquidity. These currencies are usually more susceptible to local economic factors.
Minor currency pairs, also known as cross currency pairs, are pairs that do not include the U.S. dollar, but do include at least one of the world's other three major currencies. That is to say that the Japanese yen, British pound or the euro are at least one, if not both of the currencies included in the pair.
Often, the minor currency unit has a value that is 1/100 of the major unit, but 1/1000 is also common. Some currencies do not have any minor currency unit at all. In others, the major currency unit has so little value that the minor unit is no longer generally used (e.g. the Japanese sen, 1/100th of a yen).
When someone trades currencies they do so by taking a long position on one currency and a short position on another. This is an inherent part of forex trading as currencies are always traded in pairs with their value in relation to each other determining whether or not a trader makes a profit.
With the invention of currency crosses, individuals can now bypass the process of converting their currencies into US dollars and simply convert it directly into their desired currency. Some examples of crosses include GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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