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All You Need to Know About Currency Pairs

5:39 PM Nov 6, 2019
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For beginners

Have you ever changed money in an exchanger? Then you can say that you are already a participant in the foreign exchange market. Trading on Forex takes place online, but the principle remains the same - you sell or buy currency and exchange it for another. That’s why Forex instruments come in pairs.

How to Read Currency Pairs?

Each currency has an official abbreviation that is used everywhere, including Forex:

  • EUR for Euro
  • CAD for Candian Dollar
  • NZD for New Zealand Dollar

I’ve already mentioned above that currency trading is held in pairs. The left currency is called base, and the right one is called the quote currency. The price of the instrument is the amount you pay in quote currency for one unit of the base currency. Take a look at this example:

NZD/USD = 0.6365

In this case, the New Zealand dollar is the base currency, the US dollar is the quote currency. So, to buy one NZD you need 0.6365 USD.

You probably noticed that there are two available prices on the charts:

  1. Bid price - currently the best price for selling
  2. Ask price - currently the best price for buying

These prices are usually a few pips from each other. This difference, also known as a spread, is the commission you pay when opening your trades. On this commission brokers mainly earn their money.

Types of Currency Pairs

Depending on the currencies included, pairs are divided into three main groups:

  • Majors
  • Cross-currencies or minors
  • Exotic

Majors

The majors always include the US dollar. The second currency comes from the countries with the most developed economies:

  • Eurozone
  • United Kingdom
  • Japan
  • Switzerland
  • Australia
  • Canada
  • New Zealand

Therefore, the majors include EUR/USD, NZD/USD, USD/CHF, AUD/USD, USD/JPY, USD/CAD, GBP/USD, and USD/CHF. Most traders prefer to trade these pairs. For instance, EUR/USD covers around 30% of the overall trading volume on Forex.

This happens because majors have the lowest spread in the market and the highest volatility, which potentially increases your profit.

Cross-Currencies

This type of pairs includes currencies from the countries I listed above but doesn’t contain the US dollar. Traders mostly prefer to trade with the British pound, Euro and Japanese yen. Examples of cross rates:

  • EUR/GBP
  • EUR/CAD
  • EUR/JPY
  • NZD/JPY
  • GBP/JPY

Spreads on cross-currencies are a bit higher than on majors, that’s why they are traded a bit less.

Exotic

This type includes currencies from the countries listed above on one side and countries with a slightly less developed economy, on the other. This mainly includes Singapore, Hong Kong, European countries outside the Eurozone, etc. Examples of exotic pairs:

  • USD/SGD
  • USD/HKD
  • USD/SEK

Traders choose exotic pairs less often since they usually have the highest spread and low volatility. Often the price of these instruments barely fluctuates, therefore, high profits in a short time are less likely on these markets. You can expect high volatility for exotic pairs only after major events in the respective countries.

Sometimes residents of these “exotic” countries prefer to trade specifically these pairs, as they are the first to know about any events taking place in their area, and can respond to them in a timely manner.

What Affects the Currency Price?

Experienced traders always begin their day by checking the economic calendar, since there you will find almost all events that influence the price of a currency. Among others, these are the aspects that have the strongest impact on quotes:

  • Economic indicators: GDP, unemployment, inflation, real estate and automobile sales, etc.
  • Central Bank Interest Rates
  • Political events: elections, corruption scandals, etc.
  • Natural disasters

Which Currency Pair to Trade?

Your choice should depend on your experience and your trading strategy. Novice traders should probably start with major pairs or cross-currencies. However, it’s important to be careful with high volatility as it can play against you.

I suggest you choose one favorite currency pair. You will master one market much faster. If you become a specialist in trading for at least one pair, it will be easier for you to become a Forex professional in the future.

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