Forex pairs are combinations of two different currencies that are traded in the foreign exchange (forex) market. Each pair consists of a base currency and a quote currency. In this guide, we will cover how currency pairs work, the types of currency pairs, and how to read forex pairs with examples.
Quick Insights
What is currency pairs in forex trading?
The foreign exchange market (forex) is a huge global market with $6.6 trillion traded daily. There are around 170 currencies globally, leading to over 28,000 possible pairs, but only a few major ones dominate trading.
What is forex pairs? In forex trading, a currency pair represents the value of one currency against another Each currency pair is made up of a base currency and a quote currency. The base currency is the currency you’re buying (left side of the pair), and the quote currency is the currency you’re using to buy the base currency (right side).
How forex pairs work
- When you see something like EUR/USD, it shows how much one currency (the euro, in this case) is worth compared to another currency (the U.S. dollar).
- Exchange rates float: The value of currencies is not fixed; it changes all the time. This happens because of various factors, like economic news or market conditions.
- Base and quote currency: In EUR/USD, the euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency. If the rate is 1.3045, it means 1 euro can be exchanged for 1.3045 dollars.
- Making a trade through long and short positions are:
- Long position: If you think the euro will get stronger compared to the dollar, you buy euros and sell dollars. You profit if the euro’s value goes up. Here, we revealed the top 5 best trading strategies for consistent profits.
- Short position: If you think the euro will get weaker compared to the dollar, you sell euros and buy dollars. You profit if the euro’s value goes down.
- PIPs: These are small changes in exchange rates. For example, if EUR/USD moves from 1.3045 to 1.3050, that’s a 5 PIP change.
- In essence, currency pairs show how one currency’s value compares to another, and traders try to profit from these changing values.
Types of currency pairs
Trading currency pairs in forex trading are categorized into three main types: major, minor, and exotic pairs. Here are they:
Major forex pairs
Major currency pairs always include the US dollar (USD) and one of the other major currencies, like the Euro (EUR) or the British Pound (GBP).
These pairs are heavily traded and come from stable economies, making them less volatile. They have a low bid-ask spread, meaning the difference between buying and selling prices is small.
The most traded major pairs are:
- EUR/USD (Euro/US Dollar): Represents the Eurozone and the US, accounting for over 22% of all forex trades.
- USD/CHF (US Dollar/Swiss Franc): Known as ‘Swissie’, it’s popular due to Switzerland’s stable financial system.
- USD/JPY (US Dollar/Japanese Yen): Called ‘ninja’, it’s Asia’s most traded currency pair.
- GBP/USD (British Pound/US Dollar): Known as ‘cable’, it makes up 9.5% of daily trades.
- Other notable major pairs include EUR/GBP (Euro/British Pound) and USD/KRW (US Dollar/South Korean Won).
Minor forex pairs
Minor currency pairs do not include the US dollar. They consist of other major currencies paired with each other or with smaller currencies. These pairs are well-known but have lower trading volumes compared to major pairs. Examples include:
- AUD/CAD (Australian Dollar/Canadian Dollar)
- GBP/AUD (British Pound/Australian Dollar)
- GBP/JPY (British Pound/Japanese Yen)
- EUR/JPY (Euro/Japanese Yen)
- GBP/CHF (British Pound/Swiss Franc)
Exotic forex pairs
Exotic currency pairs involve one major currency and one currency from an emerging market. These pairs are less liquid, meaning they have larger bid-ask spreads and can be more volatile due to political and economic instability. Examples of exotic pairs include:
- USD/TRY (US Dollar/Turkish Lira)
- USD/HKD (US Dollar/Hong Kong Dollar)
- EUR/MXN (Euro/Mexican Peso)
- GBP/SGD (British Pound/Singapore Dollar)
How to read forex pairs
In forex trading, currency pairs show how much of one currency you need to buy another currency.
Currency pair format
- Base currency: The first currency in the pair (e.g., EUR).
- Quote currency: The second currency in the pair (e.g., USD).
- For example, in the pair EUR/USD, EUR is the base currency, and USD is the quote currency.
Reading a currency pair quote
- Quote example: EUR/USD = 1.2055/1.2057
- 1.2055 is the bid price (the price at which you can sell EUR).
- 1.2057 is the asking price (the price at which you can buy EUR).
Understanding the prices
- To buy EUR/USD, you need 1.2057 USD for each EUR.
- To sell EUR/USD, you get 1.2055 USD for each EUR.
Bid-ask spread
- Bid-ask spread = Ask Price – Bid Price
- In this example, it’s 1.2057 – 1.2055 = 0.0002 USD, or 2 pips.
Forex pairs examples
Currency pairs are how currencies are quoted and traded in the forex market. Each pair involves two currencies: the base currency and the quote currency.
Example: USD/CAD = 1.3
- USD/CAD: This is the currency pair being quoted.
- 1.3: This number tells you how much of the quote currency (CAD) is needed to buy one unit of the base currency (USD).
- Base currency: In this example, USD (U.S. Dollar) is the base currency. It’s the one you are buying or selling.
- Quote currency: CAD (Canadian Dollar) is the quote currency. It tells you how much of it you need to buy one unit of the base currency.
- So, if X wants to exchange CAD for USD, he will get USD 1 for every CAD 1.3 he spends.
How to buy forex pairs
Here are simple steps to buy currency pairs:
Pick a broker
- Find a broker that fits your needs. Consider factors like fees, user interface, minimum trading volumes, and educational resources (like demo accounts).
Choose how you want to trade
- Spot trading: Buy and sell currencies at the current market price.
- Forward trading: Agree to buy a currency at a specific price in the future.
- Futures trading: Enter into a standardized contract to exchange currencies at a future date and price.
Choose a currency pair
- Decide which currencies you want to trade (e.g., AUD/USD, GBP/USD, USD/JPY).
- Highly traded pairs like EUR/USD are easier and cheaper to trade.
| Recommended Reading: 10 Key Benefits of Trading Forex
Conclusion
Forex pairs involve trading one currency against another in the global forex market. They come in three types: major pairs (like EUR/USD), minor pairs (like GBP/JPY), and exotic pairs (like USD/TRY).
To trade, you need to understand the bid and ask prices, and how to read currency pairs, with the base currency listed first and the quote currency second. Traders aim to profit from fluctuations in exchange rates by taking long or short positions. Learning to read and trade these pairs is essential for success in the forex market.
Pro Tip
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