What are Currency Pairs in Forex Trading? How do they work?
What are currency pairs?
Currency pair is a quotation where one currency is quoted against the other currency. The currency that is written first in the currency pair is the base currency and the second currency is the quote currency. Eg. EUR/USD. Here EUR is the base currency and USD is the quote currency. In a currency pair the values of the currencies are compared with each other. This indicates how much quote currency is required to exchange with 1 base currency.
Currencies can be identified by the ISO Currency code which comprises three alphabetical codes that are associated with the international market. Eg. EUR is the ISO currency code for euro and USD is the ISO code for US Dollar.
How currency pairs are traded in the Forex Market?
The Forex Market is highly liquid and provides a greater opportunity for buying, selling, exchanging and speculation of the currencies. This market is open 24 hours, five days a week and has a high trading volume.
Trading currency pairs involves concurrently buying one currency and selling the other. But the currency pair is considered to be one entity.
Types of currency pairs:
1. Major currency pairs: These are the most popular currency pairs among forex traders. These currency pairs have high liquidity and low volatility. These currency pairs include:
- EUR/USD (euro v/s US Dollar)
- USD/JPY (US Dollar v/s Japanese Yen)
- GBP/USD (Sterling Pound v/s US Dollar)
- USD/CHF (US Dollar v/s Swiss Franc)
- AUD/USD (Australian Dollar v/s UD Dollar)
- USD/CAD (US Dollar v/s Canadian Dollar)
2. Minor Currency Pairs: Currency pairs that do not have US Dollar involved are minor or cross currency pairs. They have slightly wider spreads and low liquidity. Eg. EUR/GBP, GBP/JPY, and EUR/CHF.
3. Exotic Currency pairs: These currency pairs are made from the combination of the major and minor currency pairs. They are not that liquid and even the spreads are wider. Eg. USD/SGD (U.S. dollar/Singapore dollar).
There are many forex brokers that offer a wide range of currency pairs:
Mostly the currency pairs with high liquidity are traded by traders because these pairs generally have tight spreads. Major currency pairs are highly recommended for trading to beginners as well because of less volatility and high liquidity they offer compared to the minor and exotic currency pairs.
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