Forex traders buy and sell currencies in the forex market, which are classified into three categories; major, minor, and exotic pairs, an example of some forex currencies include the US dollars, Euro, British pound, and others.
There are currencies traded in a higher volume than other pairs, most of them are from countries with a higher GDP and are known as major currency pairs.
What is a currency pair?
In the forex trading industry, a common word used by most people is forex pairs. A forex pair comprises two currencies with different values, one is a base currency, which is the first currency, and another is the quote currency, the second currency.
Forex trading works by buying and selling one currency against the other. For example, if you have a forex pair such as the EUR/USD, the EUR is the base currency while the USD is the quote currency.
The most-traded forex pairs are those with the highest liquidity in the industry, which means that they get traded more than other currency pairs.
How do buying and selling currency pairs work?
Buying and selling currency pairs takes place on the currency market, which traders access through forex trading platforms. If you buy the EUR/USD, you are buying the euro against the US dollar, if you think the euro will increase in value against the dollar.
So, if you speculate that the euro will increase in value, you buy the euro and if the speculation is correct, you can profit by selling it at a higher price.
Using the same example of the EUR/USD, if you believe the USD will increase in value against the EUR, you go short and buy the USD against the EUR. The forex broker offers the rates of the buying and selling quotes to use, you can sell currencies in high or low volumes.
What are the eight major currencies?
The US dollar (USD)- is also called the US buck or the green buck and is the most traded currency in the forex market. It has the highest liquidity and is a stable currency pair backed up by the high GDP of the United States.
The Euro ( EUR)– is known as the fibre in the forex market, countries in the European Union use it. It is one of the strongest currencies and the second-highest traded currency in the forex industry.
Japanese yen (JPY)– is a currency of Japan and also is a currency known as a safe currency in forex. When the market is volatile, investors buy the Japanese yen because its value increases slowly, and is hardly affected when there is volatility. It is the third most traded currency in forex.
The British pound (GBP)– is one of the most traded currency pairs popularly known as the starling or pound in the forex market. It is the currency of Britain which also has a high GDP compared to many other countries in Europe. It is the fourth most traded currency in forex.
The Canadian dollar (CAD)– is also known as the loonie in forex, which comes from a bird known as the loon present in Canada. It is one of the most traded currencies in the forex industry.
The Australian Dollar (AUD) – is also known as the Aussie in the forex. It is a currency of Australia and is a commodity currency, which means it is affected by the exports and imports of commodities between Australia and its trading partners.
The Swiss Franc (CHF) – is also known as the swiss in the forex industry. It is the currency of Switzerland and is popular due to its political and financial stability. Even though Switzerland is not at the level of the other major currencies in size of the GDP, most traders consider it a safe currency when the market is volatile.
New Zealand Dollar (NZD) – is also known as the Kiwi, due to the bird Kiwi, which is the national symbol in New Zealand.
What are the seven major currency pairs?
Major currency pairs that have the most liquid markets are the
|EUR/USD||Euro/US Dollar||Eurozone/United States|
|USD/JPY||US Dollar/Japanese Yen||United States/Japan|
|GBP/USD||British Pound/US Dollar||Great Britain/United States|
|USD/CHF||US Dollar/Swiss franc||The United States/Switzerland|
|USD/CAD||US Dollar/Canadian Dollar||The United States/Canada|
|NZD/USD||New Zealand Dollar/US Dollar||New Zealand/United States|
AUD/USD Australian Dollar/ US Dollar Australia/ United States
These Seven currency pairs are the most traded in the forex market. The eight most traded currencies are Euro, US Dollar, Pound Sterling, New Zealand Dollar, Canadian Dollar, Swiss Franc, Australian Dollar, and the Japanese yen.
The Eurozone consists of 19 countries in Europe that united to form the European Union. Most of these countries agreed to use the Euro as their main currency.
Countries in the Eurozone using the Euro include; Austria, Netherlands, Belgium, Finland, Ireland, Estonia, Italy, Lithuania, Luxembourg, Cyprus, Slovenia, Spain, Germany, Malta, Slovakia and France.
Other major pairs include cross currencies which are forex pairs that don’t involve the US Dollar. These include the:
|GBP/EUR||British Pound/Euro||Great Britain/Eurozone|
What are the most popular forex pairs?
The most popular pairs are also known as the traditional currency pairs in forex. They are:
EUR/USD – the Euro versus the United States dollar
USD/ JPY – the United States Dollar versus the Japanese Yen
GBP/USD – the British Pound versus the United States Dollar
USD/CHF – the United States Dollar versus the Swiss Franc
The popularly traded currency pairs are currencies that have the highest liquidity in the forex market. They are at the top of the list of currency pairs since they are the most actively traded currency pairs with a high volume compared to the other currencies.
The EUR/USD, popularly known as the Eurodollar or the fibre
This currency pair consists of two currencies from two of the world’s leading economies. It is a forex pair with the highest volume of traders and is very liquid, which is one of the factors that attract many investors. It has low volatility due to the political and financial stability of the economy of countries in the European Union and the United States.
In the EUR/USD, the EUR is the base currency, while the USD is the quote currency. This means that if your forex broker quotes the EUR/USD at 1.1200 you require 1.1200 US dollars to purchase one EUR.
It has tight spreads, meaning that it costs less to buy or sell the EUR/USD. The tight forex spreads are due to the high volume of traders trading this pair.
USD/JPY known as the Dollar Yen or the Gopher
It consists of the United States Dollar (USD), and the Japanese Yen (JPY). The USD is the base currency and the Japanese yen is the quote currency. The Japanese yen has a lower interest rate than the United States dollar.
The Japanese yen is the most traded currency pair in Asia, and the USD/JPY has the second-highest volume of traders in the forex industry with 13.2% of the total volume. It has low volatility since Japan and the US have stable economies.
Japan has tried to increase inflation through a low-interest rate to increase the demand for the Japanese yen. Japan has a large economy that is driven by machinery exports and machinery and industrial production.
The Japanese yen is also called a safe currency, when other better performing currencies, such as the USD. Forex traders shift their investments to the Japanese yen to protect their investments since it has low-interest rates and a stable economy.
The GBP/USD known as the pound dollar or cable
It is the third most liquid forex pair in the forex industry, with about 11% of the volume. Traders interpret it as the amount USD a trader requires to buy the British pound. It has a positive correlation to the EUR/USD because Britain has ties with the European Union.
The GBP/USD is most active in forex at 14:00 UK time when the London and UK markets are open. GBP is the base currency, while USD is the quote currency. It got nicknamed the cable because of the underwater cables used to carry the price quotes between London and New York before the internet connection.
The value of the GBP/USD pair increases or decreases depending on policies implemented by the Bank of England or the Federal Reserve of the US. The GBP has more strength than the USD due to the strength, of the British economy and other factors.
The USD/CHF known as the dollar Swissy
This currency pair consists of the US dollar and the Swiss franc. The Swiss franc has earned the safe currency title in the currency markets since, like the Japanese yen, it is also a currency that traders buy when there is uncertainty in the forex markets.
The USD is the base currency, while the Swiss franc is the quote currency. Switzerland’s economy is not as strong as Great Britain or the United States and therefore has a lower value than the USD.
It has a strong positive correlation to the euro because of the economic interests between Switzerland and the European Union. Switzerland is known for its reputation for financial stability and is one of the reasons many investors prefer it during volatile times.
If the markets are uncertain and there is heavy investment in the Swiss franc, this currency pair drops in value as the Swiss Franc strengthens against the dollar. When the market is stable, it increases in value as traders trade the high yielding currencies like the USD and the euro.
What are the commodity pairs?
These are major currency pairs whose prices relate to the imports and exports of their countries. Forex traders can predict the price action of these currency pairs by monitoring the price fluctuations of the commodities exported and imported from their countries.
Commodity pairs include:
It is known as the Aussie and is a commodity pair because its prices fluctuate according to the exports and imports in Australia. Australia has its highest exports of coal and iron ore, such that when prices of these two commodities fluctuate, it affects the Australian currency and the AUD/USD.
The USD also affects this currency pair because if the USD grows stronger in value, the prices of coal and iron become cheaper. The value of the Australian dollar decreases against the USD, which means the value of the coal and iron ore falls, and they sell cheaper.
New Zealand is an agricultural economy that produces and exports the highest percentage of dairy products such as milk. If prices of commodities rise, the price of the New Zealand dollar also increases, which affects the NZD/USD.
It is also known as the loonie, and it is also a commodity currency pair due to Canada being the highest exporter of timber, oil and natural gas. The prices of these commodities influence the value of the Canadian dollar.
What are the 28 Forex Pairs?
Apart from the seven most traded pairs, 28 major traded currency pairs consist of variations from the major traded currencies. There are more than 100 variations that can come from pairing currencies available in the forex market.
Here are the forex pairs that top this list:
The US Dollar currency pairs
The Euro currency pairs
The British pound currency pairs
The Australian dollar currency pairs
The Japanese yen currency pairs
The Canadian dollar currency pairs
The Swiss franc currency pairs
The New Zealand Dollar currency pairs
Factors affecting the rates of major currency pairs
Some policies have a role in influencing the movement of currency prices in the forex industry. Forex traders use these factors to predict the price movement and know when to buy or sell a currency.
Financial institutions like central banks have the mandate to ensure the stability of the country’s currency. They increase or decrease the currencies’ interest rates to control inflation or deflation.
When they increase interest rates, the currency attracts investors, which increases the value of its currency. If the interest rate reduces, the currency losses value to other higher-yielding currencies.
Interest rates influence the value of a currency and that is why forex traders pay attention to any news releases on the interest rates. It helps forex traders to know which currency pairs have the potential for more profit and investment.
The economy of a country only grows when it has political calmness. The economy affects the currency of a country, the higher the economic growth, the higher the value of the currency in the forex market.
Investors also tend to invest their resources in currencies with a stable political climate. This is because unstable political environments currencies have high volatility which causes the risk to investor funds. A low number of investors means less liquidity leading to low value because not many people are trading it.
Factors that cause political instability include election violence, wars between countries and government policies affecting the economy or interest rates. Any factors affecting the economy of a country will influence the currency value.
After a period, most countries release economic data regarding a financial year. Announcements help forex traders know their current position in the forex industry. An economic calendar allows forex traders to know financial events which can potentially affect the currency value.
Some economic information traders follow when trading a currency include inflation rates, the gross domestic product, employment/unemployment rates and Purchasing Manager’s Index (PMI). All these data affect the price movement of the currency of a country.
Volatility is when prices fluctuate in the forex market, influenced by economic, political and interest rates. In the forex market, volatility is crucial to trade and profit. Volatility can also cause forex trader to lose their investments if the market makes abrupt movements.
Forex traders prefer to invest less or nothing in more volatile currency pairs such as the exotic and minor currencies. Major currencies like the US, Euro and British Pound tend to have less volatility and attract more investors.
The US and Britain have stable economies and a political climate for economic growth. It is away their currencies have low volatility.
Trading tips when trading currency pairs
There are some crucial tips that forex traders should know when they want to start trading currency pairs.
If you are a new trader, it is better to start with a currency pair with high liquidity and low volatility, such as major currency pair like the EUR/USD. High liquidity helps enter and exit the market fast because of the high volume of buyers and sellers. Low volatility is also crucial when managing an open trading position.
It is also imperative to know which market opens when trading a currency pair. For example, the London, New York, Tokyo and Sydney trading sessions open at different times. These influence the activities of a currency pair. For example, the Euro or the GBP will be active when the London session opens.
Have a trading strategy that works depending on the market you want to trade. A trading strategy is like a plan that guides you on when to enter, exit the market or place the risk management strategies. It also helps forex traders to maintain discipline and emotional restraint when trading.
Choose the best trading broker if you want to trade forex pairs. Some factors to consider include; license/ registration, trading platforms, leverage ratios, major currency pairs available, trading tools, educational resources, research materials, the demo account and payment platforms.
Ensure to conduct both fundamental and technical analysis before trading. Fundamental analysis helps the trader know market trends, news and events that influence price action. Technical analysis helps traders understand the market movements and predict the fluctuations before they happen, based on historical and price patterns.
Practice your trading before risking real investments. Most trading brokers have a demo with the same features as the live trading account, but the demo uses virtual money. It allows traders to practise their trading strategies before applying them with real funds.
Lastly, a forex trader needs to have trading discipline and consistency. The market will not always move according to the traders’ expectations, and traders need to understand that. It is best to learn to control emotions when trading to avoid making emotional decisions that increase the chances of losing.
Forex trading has grown popular even as people find ways to diversify income. The most-traded forex pairs are from the leading economies because they are high-interest currencies.
If a forex trader understands the underlying currency pair well, it is possible to profit in the forex market. A forex trader should research before choosing a currency pair to trade. It will help to know the factors that affect it, and from this knowledge, they can make a better trading strategy.
Frequently Asked Questions
What is a currency pair in forex?
It is a combination of two currencies with two different or similar values in forex. The currencies get paired together so that traders can buy one currency against the other to profit.
What is a cross-currency pair?
These are currency pairs traded in the forex industry not paired to US dollars. Some include EUR/JPY, EUR/GBP, and GBP/CHF. Forex traders get attracted to cross pairs because they are volatile and offer more opportunities for trading.
How many forex pairs are there in the industry?
There are up to 180 currencies in forex, but not all can get traded. You can form many currency pairs If you combine forex pairs from these currencies. Forex brokers can only offer 60-80 currency pairs for trading.