Introduction to Currency Pairs
In Forex trading, currencies are always traded in pairs. This means you are buying one currency while selling another. Currency pairs are the foundation of Forex trading, and understanding how they work is crucial for any trader.
How Currency Pairs Are Quoted
A currency pair is quoted by showing the value of one currency against another. The first currency in the pair is called the base currency, and the second is the quote currency. The price of a currency pair represents how much of the quote currency is needed to buy one unit of the base currency. For example, in the EUR/USD pair:
- EUR (euro) is the base currency.
- USD (US dollar) is the quote currency.
If EUR/USD is quoted at 1.2000, it means 1 euro can be exchanged for 1.2000 US dollars. When you exchange, You always buy the base/ first currency in the currency pair. When you sell, That means you buy the quote/ second currency. If you think market will go up you buy base/ first currency and If you think market will do down you buy quote/ second currency.
Types of Currency Pairs
Currency pairs are categorized into three main types: major pairs, minor pairs, and exotic pairs.
Major Pairs
These pairs include the most traded currencies globally and always involve the US dollar. Major pairs are known for their high number of market participants.
- EUR/USD – Euro / US Dollar – Countries: Eurozone / United States
- GBP/USD – British Pound / US Dollar – Countries: United Kingdom / United States
- USD/JPY – US Dollar / Japanese Yen – Countries: United States / Japan
- USD/CHF – US Dollar / Swiss Franc – Countries: United States / Switzerland
- AUD/USD – Australian Dollar / US Dollar – Countries: Australia / United States
- USD/CAD – US Dollar / Canadian Dollar – Countries: United States / Canada
- NZD/USD – New Zealand Dollar / US Dollar – Countries: New Zealand / United States
Minor Pairs
These pairs do not include the US dollar but consist of other major currencies. Minor pairs typically have lower market participants compared to major pairs.
- EUR/GBP – Euro / British Pound
- EUR/JPY – Euro / Japanese Yen
- EUR/AUD – Euro / Australian Dollar
- EUR/NZD – Euro / New Zealand Dollar
- EUR/CAD – Euro / Canadian Dollar
- EUR/CHF – Euro / Swiss Franc
- GBP/JPY – British Pound / Japanese Yen
- GBP/AUD – British Pound / Australian Dollar
- GBP/NZD – British Pound / New Zealand Dollar
- GBP/CAD – British Pound / Canadian Dollar
- GBP/CHF – British Pound / Swiss Franc
- AUD/JPY – Australian Dollar / Japanese Yen
- AUD/NZD – Australian Dollar / New Zealand Dollar
- AUD/CAD – Australian Dollar / Canadian Dollar
- AUD/CHF – Australian Dollar / Swiss Franc
- NZD/JPY – New Zealand Dollar / Japanese Yen
- NZD/CAD – New Zealand Dollar / Canadian Dollar
- NZD/CHF – New Zealand Dollar / Swiss Franc
- CAD/JPY – Canadian Dollar / Japanese Yen
- CAD/CHF – Canadian Dollar / Swiss Franc
- CHF/JPY – Swiss Franc / Japanese Yen
Exotic Pairs
These pairs involve one major currency and one currency from an emerging or smaller economy, such as USD/TRY (US dollar/Turkish lira) or USD/SEK (US dollar/Swedish krona). Exotic pairs tend to have low market participants. When we trade mostly we trade major and minor currency pairs.
How to Read Currency Pair Quotes
Understanding how to read currency pair quotes is essential for Forex trading. Here is a breakdown of a typical quote:
- Bid Price: The price at which the market (or your broker) will buy the base currency in exchange for the quote currency. This is the price you will sell at.
- Ask Price: The price at which the market (or your broker) will sell the base currency in exchange for the quote currency. This is the price you will buy at.
- Spread: The difference between the bid and ask price. This spread is essentially the broker’s profit from the trade.
For example, if the EUR/USD bid price is 1.2000 and the ask price is 1.2002, the spread is 0.0002 .