What is a currency pair?
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omid - Blog
omidIntroduction:
One of the most important terms of the forex market is the concept of currency pairs. Trading in the forex market is done with currency pairs. But what is a currency pair and how many types of currency pairs do we have?
In this article, we talk about currency pairs and their types. If you plan to trade in forex, you need to have sufficient knowledge of currency pairs and their characteristics.
What is a currency pair?
A currency pair in the forex market is two different currencies whose value is compared to the other. We show the currency pair as “first currency/second currency”. We call the first currency the base currency and the second currency the so-called “quote”.
In English, the base currency is always written to the left of the currency pair and is always equal to one unit. For example, in EUR/USD, the Euro is the base currency written on the left. The quoted currency is always written on the right side. In the example we gave, the US dollar is the quoted currency (in Farsi, consider the exact same form in reverse from right to left; for example, Euro/US dollar).
All currency transactions in Forex include buying one currency and simultaneously selling another currency. For example, in the EUR/USD currency pair, you must have dollars in your account and sell them to buy euros.
Very important point: all forex transactions include buying one currency and simultaneously selling another currency; But the currency pair itself can be considered as a single unit, that is, an instrument for buying or selling. In this case, “buying a currency pair” from a forex broker means buying the base currency and selling the quoted currency. Conversely, “selling a currency pair” means selling the base currency and receiving the quote currency. Let’s take an example.
Suppose you want to buy the EUR/USD currency pair in a forex broker. In this case, you must have US dollars in your account and sell them to receive Euros. What if you want to sell the same currency pair? In this case, you must have euros in your account and sell it in exchange for dollars.
What is the price quote or exchange rate?
As you probably know, no two currencies have the same price. Even the price of the US dollar is different from the Canadian and Australian dollars. This price difference is called price quote or exchange rate. In a currency pair, this quote shows how much of the quote currency you need to buy each unit of the base currency.
For example, let’s say that in the EUR/USD currency pair, the price quote is equal to 1.14282, which is displayed as:
EUR/USD = 1.14282
This means that you will pay $1.14282 for every euro.
Pricing of currency pairs
Currency pairs are priced based on bid and ask prices. The bid price is the price at which the forex broker buys the base currency from you in exchange for the quote (the second currency in the currency pair). The price of the selling request, also called the offer, is the price that the broker sells the base currency to you in exchange for the quote.
Types of currency pairs
There are different types of currency pairs. With around 170 currencies used worldwide, over 28,000 pairs can be made. However, not all of these pairs are available in the forex market. The reason is that the currencies of many different countries are not as valuable as the dollar, euro and even the Swiss franc, and the volume of their transactions is not high. Which trader is willing to exchange the currency of a country like Burkina Faso for US dollars?
According to this issue, currency pairs can be divided into three general categories:
1. Major currency pairs
The main currency pairs in the forex market are currency pairs where one side must be the US dollar. The US dollar is the most traded currency in the world. The other side of these currency pairs is the powerful currency of a developed country, including the Euro, Japanese Yen, British Pound, and Swiss Franc.
These currency pairs are more stable than their peers and experience less volatility. This is because most foreign currency transactions in the world are done with them and they belong to relatively stable economies. You usually buy these currency pairs with a low spread. That is, the price you offer to buy them is slightly different from the price the broker sells to you.
Most forex transactions are related to the EUR/USD currency pair; For this reason, this currency pair is considered the most liquid forex pair.
The best main forex currency pairs that have the largest volume of transactions are:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF (US Dollar/Swiss Franc)
- AUD/USD (Australian dollar/US dollar)
- USD/CAD
The last two currency pairs you see are called commodity currencies because the Australian and Canadian dollars are commodity-rich and both countries are influenced by their prices.
Important note: Major currency pairs are traded 24 hours a day from Monday to Thursday. The market opens on Sunday night and closes on Friday at 5pm EST.
2. Minor currency pairs
A minor currency pair is a currency pair that still belongs to developed countries; But it is not necessary to have dollars on one side. These currency pairs are also popular; But they have less trading volume than the main currency pairs.
Some of the most popular minor currency pairs are:
- GBP/JPY
- EUR/CHF
- EUR/GBP
- GBP/AUD
- AUD/CAD
These currency pairs have more spreads and their market is not as liquid as the main markets. However, their liquidity is enough that you can profit from their trading.
3. Exotic or unconventional currency pairs
These currency pairs include the currencies of emerging markets such as Mexico, Singapore and Hong Kong. The trading volume of these pairs is less than the other two types and their markets are less liquid. Because it is more difficult to find buyers and sellers for these currency pairs, they have a higher spread.
Since these currencies belong to developing countries, their value is immediately affected by political and economic events and changes in response to these events. Therefore, their price fluctuations are more.
Some of the common exotic currency pairs in the forex market are:
- USD/HKD (US dollar/Hong Kong dollar)
- USD/SGD (US dollar/Singapore dollar)
- USD/TRY (US Dollar/Turkish Lira)
- GBP/SGD (British pound/Singapore dollar)
- EUR/MXN (Euro/Mexican Peso)
Some important points about forex currency pairs
- The USD/CHF currency pair is called “Swiss” and is one of the popular options for traders; Because the Swiss financial system is considered a safe haven. In times of market volatility, the Swiss Franc tends to be relatively stable.
- After Brexit, the relationship between the pound and the euro decreased. For this reason, it is currently difficult to predict the relative value of this currency pair, and investing in it seems a bit risky.
- One of the new popular currency pairs is USD/KRW, which trades the US dollar against the South Korean won. Won is the fourth largest currency in Asia and the popularity of the currency pair increased following the rapid development of South Korea in the 1960s.
