Advancements in modern technology, high speed internet and increased computing power has made trading various asset classes easily accessible for traders. Investors can speculate on stock, commodity, index and currency prices. Forex pairs are unique in that they consist of 2 parts and one currency is always valued in relation to another. What’s more, Forex markets are the most liquid markets in the world and billions of dollars worth of currency is exchanged on a daily basis.
Currency pairs definition
Currency pair consists of two parts: base currency and quote currency. Base currency is the first one in the pair and it’s measured in relation with its quote currency. In EUR/USD, Euro is a base currency and its price shows how many US Dollars are needed to buy one Euros.
Why it is important for forex traders to understand currency pairs
- Currency prices have a more cyclical nature. Understanding currency pairs in trading can help investors better understand what makes FX pairs different from trading other instruments.
- Forex pairs consist of a base currency and a quote currency. And each should be analyzed in order to predict the future price.
- Major forex pairs such as EUR/USD, USD/CHF, USD/JPY and GBP/USD are widely regarded as ‘safe-haven’ assets due to their stability.
- Currencies of highly developed countries have more liquidity and tight spreads. Learning about different pair categories can help traders better select currencies for their watchlist.
Currency pairs in more detail
The currency pair consists of base currency and quote currency. For instance in GBP/USD, the British Pound is valued against the US Dollar. When you see a GBP/USD price at 1.15, it means that for purchasing 1 British pound, you need 1.15 US Dollars. When investors are purchasing physical precious metals or physical stocks, they are waiting for the price to increase in order to make a profit. In CFDs and currency pairs, traders can benefit from price going in any direction by going long or short.
What’s more, currency pairs have a more cyclical nature, as they are backed by nations and real economies. As we have already mentioned, one currency is valued in relation to another and the risk of one particular currency completely collapsing is small compared to stocks. Stock prices can go through the roof or hit a zero.
Currency pairs are categorized into Majors, Minors, and Exotics. Major pairs are the most liquid and offer the tightest spreads. Major pairs consist of one part major currencies such as EUR, GBP, JPY, CAD, NZD, CHF and AUD. And the other part in a pair is always US Dollar.
Minor pairs are made out of Major currencies but don’t include US Dollar. Minors are less liquid than Majors. As for the Exotic pairs, they are from developing nations and offer the least liquidity.
The most heavily traded currency is the US dollar, which features in over 80% of the trades done in Forex. And the EUR/USD pair is the most commonly traded currency pair.
Currency pair example
As an example, let’s look at the EUR/USD pair. One of the major pairs, EUR/USD measures the Eurozone currency against the world reserve US dollar.
The difference between bid and ask prices is the spread. The lower the spread of a pair is, the more liquid and easy to trade it is.
The spread is measured by pips, or the fourth decimals of the difference between bid and ask prices.
FAQs on currency pairs
What is the most traded currency pair?
The EUR/USD currency pair, which measures the euro against the dollar, is the most frequently traded currency pair. Major currency pairs attract a disproportionately high amount of trading volume and number of trades.
What are the major currency pairs in forex?
The major currency pairs in forex are EUR/USD, GBP/USD, USD/JPY and USD/CHF. All four of these pairs involve the US dollar and are composed of currencies from the most developed economies in the world.