Forex Trading: Understanding Currency Pairs

In Forex trading, the two currencies being traded make up a foreign money pair, and there are many different pairs that Forex day traders can trade. Traders can choose “main pairs,” “crosses,” and “exotics,” and there are pairs that are widespread like EUR/USD (euros and U.S. dollars) and far less frequent like USD/MXN (U.S. dollars and Mexican pesos).

For starters, although, let’s check out what a foreign money pair consists of. Foreign money pairs are made up of a base currency (the primary) and a counter currency (the second). In the EUR/USD currency pair, EUR is the bottom foreign money and USD is the counter currency. If the exchange rate of a pair is rising, the base currency is rising in worth relative to the counter currency. When the change rate falls, the opposite is happening.

Additionally, after we take a look at trade rates, the rate is the amount of the counter foreign money wanted to purchase 1 of the base currency. For instance, if GBP/USD is priced at 1.5000, it will take 1.5 U.S. dollars to purchase 1 British pound.

What are the Main Currency Pairs?

It’s broadly assumed that there are four major currency pairs, although some say there are 6 or 7 “majors.” These 4 pairs drive the most action in the Forex market, and they are probably the most closely traded. Meaning there’s tons of trade volume and liquidity in each of those pairs, and subsequently, the behavior of these pairs is more predictable.

The four major pairs embody:

“Euro” – EUR/USD (euros and U.S. dollars)

“Cable” – GBP/USD (British kilos and U.S. dollars)

“Gopher” – USD/JPY (U.S. dollars and Japanese yen)

“Swissie” – USD/CHF (U.S. dollars and Swish francs)

Of these four, the “Euro” tends to be the preferred trading pair. The reason: The U.S. and European Union are the two largest economies in the world, they are the most extensively held currencies, and this pair is the most broadly traded. But, all 4 feature huge volume and they’re all closely traded.

In general, lots of the major currencies make comparable movements in the markets. For instance, EUR/USD and GBP/USD tend to move in the same direction; if one is falling, the opposite will possible be falling. That’s not always true, nevertheless it occurs fairly frequently. Thusly, a trader would possible not hold comparable position in these forex pairs, as it could double up their risk. USD/CHF, although, has a negative correlation with GBP/USD and EUR/USD; which means as EUR/USD rises, USD/CHF falls and vice versa. These aren’t rules, but generalities. So they might not apply in all circumstances.

Additionally, several commodity currencies together with the Australian, New Zealand and Canadian dollar may be considered main foreign money pairs. These pairs are AUD/USD, NZD/USD, and USD/CAD. Gold and silver are additionally commodities and are paired with the U.S. dollar: XAG/USD and XAU/USD.

Crosses and Exotics: Other Types of Foreign money Pairs

Traders may want to diversify their trades and transfer away from the major forex pairs. Crosses and exotics provide that opportunity. Crosses are iml forex pairs in which neither foreign money is the U.S. greenback, and there are a number of advantages to trading crosses.

First, traders can keep away from speculating on the motion of the USD. This strategy may be helpful if major U.S. economic news is anticipated like a jobs report or curiosity rate modifications, both of which can create volatility within the market. Additionally, the crosses are likely to have stronger trends as a consequence of diverging curiosity rate expectations and other financial factors. This enables more accurate development trading. Frequent cross pairs embrace:






Finally, there are additionally “exotic” pairs to choose. These are the foreign money of a developed country paired with that of an emerging country. It’s a lot less widespread for traders to invest in the exotic pairs for a number of reasons. First, these pairs are a lot volatile making it more tough to predict worth movement. Additionally, the spread tends to be a lot larger. With main pairs, the spread may be as little as 2-5 pips; the spread for unique pairs, though, could also be as large as 50 pips or more. This makes it a lot more tough for a day trader to profit. A couple of example exotic pairs include USD/BRL (U.S. dollars and Brazilian reals) and USD/MXN (U.S. dollars and Mexican pesos).