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Forex currency pairs Your #1 Ultimate Guide

  • By: Glenn Meyers Rodriguez, Esq.
  • Published: February 10, 2021

The bid is the price the dealer would pay for the currency, and the asking price is what they would be willing to sell it. Trading currencies involves twos – when a person buys one, they are selling the other. If they want to buy the EUR/USD pair, they buy the Euro and sell the U.S. During times of economic uncertainty or struggle, investors tend to favor the US dollar. So even though the Aussie was riding the gold wave at the time (which wasn’t very impressive as you’ll see below), the US dollar was strengthening at a faster pace.

The central banks can impact currency prices by altering interest rates. They do this to safeguard international trading and their economic health. But this pair also shows with a high volatility level and is hard to predict accurately.

Understanding Forex Currency Pairs

So whether you’ve been trading for two days or two years, I can all but guarantee that you’ll learn something new. I’ll admit that trading currencies is quite different from purchasing a home, but the idea is the same – you need to understand where your money is going. There is a list of currencies considered to be less exposed to economic turbulence than the others. These currencies are known as safe-haven currencies, and they include the US dollar , the Japanese yen , and the Swiss franc . As you’ve probably noticed, these pairs mainly consist of the euro, the yen, or the British pound.

What am I actually buying and selling anyways in forex currency pairs?

The most reasonable thing is definitely to work with only one pair and not to play with the opposite pair trades, because you can quickly reach ugly values. If we open trades on both pairs, we thereby immediately double our position and the risks. Because if you are wrong with the forecast, you will be doubly wrong at once, because the pairs are mirrored.

  • And it varies based on the type of execution model implemented by the brokers.
  • Instead of buying commodity stocks, traders can exchange for a commodity pair.
  • When purchasing stock, a person exchanges a currency, such as the U.S Dollar, for either a share of a business or a commodity.
  • Remember that the foreign exchange market is the most liquid financial market in the world, so even some of the less popular currencies are extremely liquid.
  • These were my go-to currency pairs back then, and many still are today with a particular emphasis on the AUDUSD and the NZDUSD.
  • However, this currency pair is heavily influenced by risk sentiment and can, therefore, be prone to quick, large movements.
  • If we talk about currency pairs then it is imperative to say that their existence in the early 90s gave rise to an entire domain of trading.

This is displayed as a difference between your ASK and BID prices. In our EUR/USD example for simplicity we only bought/sold 1 unit of EURO. The broker would tend to buy/sell in bulk for everybody trading through them, for all currencies available. So when the prices changes i.e a currency pair increases/ decreases by a certain number of pips, then the actual price of the currency pair also changes. Forex trading is not all about currency and making profits or losses. There is so much more than that you need to know if you want to make it in forex trading.

Currency Pairs

Understanding the forex market, you have to understand that currencies come in pairs. Forex market refers to trading currencies in pairs to make things easier. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey.

Understanding Forex Currency Pairs

This is one reason why I made the transition from equities to Forex in 2007. To clarify, this does not mean you have to place two orders if you want to buy or sell a currency pair. Last but not least, it’s important to remember that the relationship between the base and quote currency is always changing.

What is a currency pair?

It represents how much of the quote currency the broker is willing to pay to buy the base currency from you. This is the price at which you will sell the base currency to the market. Using the above example, a currency trader would establish a position where they are simultaneously long the euro, and short the dollar.

In the Forex market, the Swiss franc is considered a safe haven currency, hence the reason the USDCHF experienced mixed results during the 2008 period. Despite the small size of New Zealand, the small island nation has an abundance of natural resources. However, the country’s significant agricultural presence is what attracts the “commodity currency” label. Although the correlation is never static, over the last ten to fifteen years, the Canadian dollar has held a positive correlation to oil of more than 75% on average.

The price to buy a currency will typically be more than the price to sell the currency. This difference is called the spread and is where the broker earns money for executing the trade. Spreads tend to be tighter for major currency pairs due to their high trading volume and liquidity. The EUR/USD is the most widely traded currency pair, so it is no surprise that the spread in this example is 0.6 pips. Trading currency pairs is conducted in theforeign exchange market, also known as the forex market.

Also, costs are inversely proportional to the volatility of the market. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

Currency Pair

If you were to pair each currency up with another, it’s a lot. Due to the overall lower degree of liquidity, exotic currency pairs tend to be far more sensitive to economic and geopolitical events. Learning with Eightcap can provide you with educational materials that could become the material needed to forge your key to trading major forex pairs. In forex, we have the big boys called the majors and the little fellows called the minors. All of them are being traded, but some are more popular than others.

Understanding Forex Currency Pairs

Over the years the yen has been one of the more consistent safe haven currencies, which has made it my go-to currency when fear begins to grip global markets. Remember that if the quote currency experiences heavy appreciation, the pair is likely to move lower over time. It matters because investors tend to flock to gold during times of economic unrest. And if the Australian dollar tracks gold prices, then there’s a good chance that the Aussie will also capitulate during hard economic times. In fact, many of the major crosses average more daily volume than some stock exchanges.

Understanding forex quotes and Currency Pairs

Our article, “The History of Forex” highlights the events in history that have influenced the market to be the $5 trillion a day market. The smallest movement for non-JPY currency pairs is one pip . The USD/JPY is also a good pair to trade thanks to low spreads and high liquidity. When it comes to Euro crosses, the direction tends to be determined by Eurozone economic results relative to the Swiss or UK economies. News from the UK, for example, will affect the EUR/GBP and the GBP/USD, but Eurozone data will have a greater effect on euro crosses than on the EUR/USD.

One of the most popular safe havens is in the form of a metal rather than a currency. But contrary to popular belief, gold isn’t a great performer during economic uncertainty or even recessionary periods. In fact, Canada exports over 2 million barrels a day to the US alone. This high dependency on the commodity as an export makes the Canadian dollar vulnerable to fluctuations in the price of oil.

As you can imagine, the velocity of any move depends on the relationship between the two currencies. For instance, if one is strengthening while the other is weakening, the move will be more pronounced than if only one currency is on the move. Not surprisingly, the next example is the EURUSD in a starting a forex brokerage bear market. In our example, if the Euro were to strengthen while the US dollar remained static, the EURUSD would rise. Conversely, if the Euro weakened the pair would fall, all things being equal. This website is owned and operated by Just Global Markets Ltd., which provides investment services.

What is the easiest forex pair to trade?

Crosses that involve any of the major currencies are also known as minors. The most frequently traded crosses involve the EUR, JPY, and GBP. In forex, it’s based on the number of active traders buying and selling a specific currency pair and the volume being traded. Fundamental analysis is simple, especially if you only trade a one or two currency pairs each day.

Understanding Currency Pairs

A lot of institutions are involved in these two economies, any of which can affect price with a single statement. Likewise, since the European economy is made up of multiple smaller economies, economic results or announcements can affect the price. More people trade the EUR/USD and at higher volumes, for example, than the NZD/JPY. This means that the EUR/USD is more liquid than the NZD/JPY. This means that both pairs are literally following each other.

Conversely, if you buy the EURUSD (also referred to as going “long”), you are buying the Euro and selling the US dollar. For example, if you sell the EURUSD (also referred to as going “short”), you are simultaneously selling the Euro and buying the US dollar. There are essentially two ways in which any currency pair can move higher or lower. Major currencies are considered currencies that are most often traded against the U.S. dollar, such as EUR/USD, AUD/USD, and USD/CAD. The Yuppy, like all crosses, is influenced by the underlying USD pairs. However, while the EUR/USD does have some impact, the USD/JPY seems to be a key driver due to its volatile tendency.

And if you want to become consistently profitable, it’s essential that you understand everything there is to know about the currency pairs you’re trading. Forex currency pairs are trading instruments of the forex market. They are shown as two currencies where the value of one currency is quoted against the other.

If we talk about currency pairs then it is imperative to say that their existence in the early 90s gave rise to an entire domain of trading. The quote is the price at which the currency pair is traded. The reference quotation is information offered by the market maker for reference only.