Currency pairs, which can be found within the foreign exchange market, measure the value of one currency against another. The currency pair is split into the ‘base’ currency, which is the first named currency; and the secondary currency, which is called the ‘quote’ currency. The price displayed shows how much of the quote currency is required to buy one unit of the base currency.
The foreign exchange market, also called the currency or forex (FX) market, is the world’s largest and most liquid financial market in the world, with over $5 trillion worth of currencies traded globally every day.
Forex is always traded in pairs. This is because forex trading is simultaneously buying one currency and selling another. The currency pair itself can be thought of as a single unit, an instrument that is either bought or sold. Examples are the euro and US dollar (EUR/USD), or the British pound and Japanese yen (GBP/JPY).
Currency trading is divided into two parts. The ﬁrst currency in an forex pair is known as the base. The base currency is the one that a trader thinks will go up or down against the second currency in the pair. This second currency is known as the quote or counter currency. Currency trading is divided into two parts. For example, if you buy pound versus US dollar (GBP/USD), you are anticipating a rise in the pound at the expense of the US dollar. Profit and loss is normally expressed in the amount of the secondary currency in forex trading.
Every currency pair has a bid and an offer price. This is the rate at which you can buy a currency, and the rate at which you can sell a currency. The price maker (usually a broker) gives you a rate at which they are willing to buy or sell a currency pair. Learn more about bid prices and ask prices.
The table below illustrates basic bid and offer prices.
|Currency pair||Quotation||Bid||Offer||Client buys||Client sells|
There are many currency pairs for traders to choose from when placing a trade in the forex market. Major currency pairs are any pair that include the US dollar (USD), which currently holds the position of the largest economy in the world. Major pairs are the most widely traded currencies in the foreign exchange market. Here are the 7 major forex pairs that are considered to be the most popular across the world:
The major pairs make up 75% of all forex trades. The majors are the most liquid and widely traded in the forex market. They make up the vast majority of all FX trades. Because these pairs have the largest volume of buyers and sellers, they also typically have the tightest bid (buy) and ask (sell) spreads. The spread is the difference between the buy and the sell price. Most traders would agree that the most profitable forex pairs to trade include the above seven major forex pairs.
In summary, major forex pairs are the most frequently traded currency pairs within the forex market. If you are interested in opening a live or demo account, read our article with suggestions for the most traded currency pairs.
The last decimal place to which a particular exchange rate is usually quoted is referred to as a pip (percentage in point). Some online forex providers typically quote no more than a fixed 1-point spread between the bid and offer on major forex pairs, and liquid cross rates in normal market conditions.
In currency trading, traders often look for currency pairs with the highest pip values, as they are very useful for short-term strategies, such as day trading. The value of each pip depends on your lot size and the specific currency that you are trading. Pips can also be useful for calculating the amount of leverage that a trader can use when foreign currency trading.
A pip is typically the fourth digit after the decimal point of the currency pair. So if the euro/dollar pair (EUR/ USD) were to move from 1.0630 to 1.0631, that’s a one pip movement. The pip value in forex major pairs determines the amount of profit or loss that a trader will make per trade.
An example of how currency pairs work is the following:
The euro against the US dollar is a widely traded major forex pair. An example of a currency price is EUR/USD = 1.3560/1.35602 (sell rate/buy rate). In this instance, the euro is the base currency and the US dollar is the quote currency. To buy one unit of the base currency, the trader will have to pay 1.3562 in the quote currency - US dollars in this case. Conversely, if the trader wishes to sell one euro, they would receive 1.3560 US dollars.
A trader buys the EUR/USD pair if they believe the euro will increase in value relative to the dollar. Buying the EUR/USD dollar pair can also be referred to as ‘going long’. A trader would sell the EUR/USD pair - also known as ‘going short’ - if they believe the value of the euro will go down relative to the dollar. Read more about short selling currency.
Expecting major economic announcements? Our forex indices are a collection of related, strategically-selected pairs, grouped into a single basket. Trade on our 12 baskets of FX pairs, including the CMC USD Index and CMC GBP Index.
The foreign exchange market differs from other ﬁnancial markets in that it has no physical location or central exchange. The whole market runs electronically, through a network of banks. It also runs continuously for 24 hours a day, five days a week. The forex market is the most popular ﬁnancial market, traded by individual retail traders, banks and businesses alike. Learn more about how you can take advantage of forex trading hours.
Exchange rates ﬂuctuate based on which currency is stronger at certain times. Traders seek out the best foreign exchange rate. These rates are supplied by global banks and updated in time periods of less than a second; the forex market is extremely fast-paced.
Commodities can also have an effect on currency pair prices. Commodity currencies are those from countries that have large quantities of commodities or other natural resources. The exchange rate of the currencies of these countries are tied to their respective export activities. This is because the strength of the economy can be highly dependent on the prices of their natural resources. Examples of these countries include Russia, Saudi Arabia and Nigeria.
A currency pair’s correlation refers to the similarities shared by various pairings. In the forex market, no single currency pair is traded completely independent of the others. An understanding of forex correlation pairs is helpful when managing a portfolio. For example, when trading the euro against the Japanese yen (EUR/JPY pair), a trader is effectively trading a derivative of the euro dollar (EUR/USD) and dollar yen (USD/JPY) pairs. Therefore, the EUR/JPY pair must be somehow correlated to one or both of these other currency pairs.
It is useful to get a better understanding of currency correlations and gain an insight into the relationship between currency pairs. Considering whether they are negatively or positively correlated, or if they are likely to move in the same direction, opposite directions, or completely randomly could be useful.
Forex trading offers frequent trading opportunities, as currency prices are constantly ﬂuctuating in value against each other. FX trading allows traders to speculate on all the major currency pairs. The only limit to which currency pairs can be traded are the pairs and quantity offered by the trading platform individual traders choose. Explore our online trading platform, Next Generation, for more information.
The three main types of currency pairs are majors, minors (crosses) and exotics. The major currency pairs are the most popular to trade, as they are the most liquid. That is to say these pairs have the highest trading volume. Minor currency pairs are ones which leave out the United States dollar, and they are normally less liquid. Examples include the euro and Swiss franc (EUR/CHF), Canadian dollar and Japanese yen (CAD/JPY), or pound sterling and Australian dollar (GBP/AUD). Cross pairs can provide trading opportunities when the majors are presenting less favourable conditions.
There are also exotic currency pairs. These are the least traded in the forex market, and are less liquid than the cross pairs. Prices can ﬂuctuate greatly, and due to the lower volume of trades, spreads can be wide. There also tends to be less historical data on these pairs, so those relying on technical analysis may ﬁnd information harder to come by.
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