What Is A Currency Pair?
The forex market is the largest, most actively traded market in the world of finance. Open 24 hours a day 5 days a week, it is extremely volatile and provides a global opportunity to profit on movements in the price and value of certain forex pairs.
When trading in the foreign exchange market, you trade currency pairs. It is important to remember that you are trading one currency against another. A currency pair is a quotation of the value of two currencies against each other. The first currency (the base currency) is quoted relative to the second currency (the quote currency). When you trade forex, you are essentially trading one currency for another, expecting to make a profit. When you buy the base currency, you are simultaneously selling the quote currency. When you sell the base currency, you are simultaneously buying the quote currency.
For example:
EUR/USD is the most commonly traded currency pair. In this quotation, EUR is the base currency and USD is the quote currency. If EUR/USD is equal to 1.20, then you require 1.20 USD to purchase 1.00 EUR.
Types Of Currency Pairs
There are four main types of forex currency pairs. These include majors, minors, crosses, and exotics.
Majors
Majors are considered the most popular currency pairs. Generally, a major currency pair includes USD and is usually more widely available to trade on the forex market, making them the most liquid. The major currency pairs are therefore the most crowded and most competitive areas in forex trading. Extensive data and price accuracy are available for majors.
Minors
Minors are slightly less common to trade than majors. Minor currency pairs do not generally include USD but they do include another major global currency, such as EUR/JPY or GBP/JPY. There is a slightly lower level of availability and liquidity with trading minor currency pairs in comparison to majors.
Crosses
Crosses are similar to minors, only they do not necessarily carry a major currency pair. Cross-currency pairs do not include USD or any other major global currency. In essence, minors are a subcategory of crosses.
Exotics
Exotic currencies are any global currencies that do not fall into the above categories. Exotic currency pairs typically include currencies from developing nations, small countries, or countries that are not regarded as financially powerful. Exotics can often be more volatile and usually less liquid, meaning they are often traded alongside majors.
Factors Affecting Trading Currency Pairs
There are several considerations to make before choosing a currency pair to trade. Although you will likely not stick to one pair, it is still worth noting some features of currency pairs.
Predictability
Predictability revolves around how much data and information is available on particular currencies. As mentioned above, major currency pairs have a greater amount of information available, including news alerts, trading patterns, and historical data. The more information available, the easier it is to predict the movements and performance of the currency value.
Price Stability
Price stability typically depends on the economic health of the country whose currency you are trading. It is important to be aware of the economic health of particular nations and monitor the effects on price movements when trading their currency. Large, financially powerful countries will usually have more price stability than smaller, developing countries due to their economic strength and political power.
Liquidity
Liquidity is an extremely important factor to consider when trading forex. Liquidity essentially ensures the currency is easy to buy and sell. Currency pairs that are more widely available to trade (major currency pairs) are more liquid than other types.
Timing
The timing of your trading is also extremely important to consider. As mentioned above, the forex market is open 24/5. Depending on where you are trading from and which currency pair you are trading with, it is important to consider the relative time of day/night.
Popular Currency Pairs In The Forex Market
In the forex market, I can trade a wide range of currency pairs. Here’s a summary of the most popular combinations to trade:
EUR/USD
The Euro / US Dollar is the most widely traded currency pair, representing the two strongest major global economies. It’s extremely liquid and easily tradeable, with information on these currencies widely available and transparent. Major economic events such as non-farm payroll, US Federal Reserve interest rates, and European Central Bank announcements are highly influential.
GBP/USD
The Great British Pound / US Dollar is another popular currency pair, relying heavily on the performance of the respective economies and interest rates set by the corresponding national banks. The GBP is sometimes called the “Pound Sterling.”
USD/JPY
The US Dollar / Japanese Yen currency pair is extremely liquid and commonly traded, combining the largest global currency with the most traded currency in the Asian market. A major factor influencing this pair’s performance and value is the relationship between the two nations.
AUD/USD
The Australian Dollar / US Dollar currency pair is popular for forex traders looking to profit from price movements due to changes in commodity prices. Commodities such as Iron Ore, Gold, and Coal greatly impact the performance of the Australian Dollar against the US Dollar and other major global currencies. The AUD is sometimes called the “Aussie” and is considered a commodity currency.
EUR/GBP
The Euro / Great British Pound is the most commonly traded minor currency pair (excluding the US Dollar). The Euro and Great British Pound represent two major global economies, and due to their close proximity and similar trade arrangements, they can be challenging pairs to trade. Remember, Brexit caused a major spike in volatility for the EUR/GBP.
USD/CAD
The price of oil significantly influences the US Dollar / Canadian Dollar currency pair. Canada relies on oil as a major export, impacting their economy. The US and Canada have a close relationship, resulting in common trade arrangements. The term “Loonie” refers to the CAD.
USD/CHF
The US Dollar / Swiss Franc currency pair is considered a safe haven investment due to the economic strength and reliability of the two currencies. The Swiss Franc is particularly stable during times of economic and political turmoil. For this reason, the USD/CHF is frequently traded, with ample data and predictability.
NZD/CHF
Another commonly traded minor currency pair, the New Zealand Dollar / Swiss Franc depends heavily on New Zealand’s agricultural sector. When trading the NZD/CHF, it’s essential to monitor global agricultural product prices. This pair is slightly safer than the NZD/USD due to the stability of the CHF.
USD/CNY
The US Dollar / Chinese Renminbi or Yuan is heavily influenced by the US-China trade war and ongoing economic and political tension. The corresponding governments often attempt to drive import and export prices higher or lower, impacting the USD/CNY value. CNY is sometimes called CNH, depending on whether it’s traded onshore or offshore.
USD/HKD
The final major currency pair on this list is the US Dollar / Hong Kong Dollar, featuring a linked exchange rate that allows the HKD to fluctuate between HK$7.75/HK$7.85 to US$1.00. The relationship between the two economies is a major contributor to value movements.
When trading forex, it’s crucial to consider the time of day, long-term investment in assets or short-term scalping on CFDs, and knowledge of the currencies and corresponding financial markets. Consider all factors discussed in this article while developing a trading strategy, as they impact currency performance.
Final Words On Currency Pairs
When I trade forex, it’s crucial to remember several key points before diving into any currency pair. To optimise my trading, I need to consider the time of day I’m trading, whether I’m focusing on long-term investments in assets or short-term scalping on CFDs, and my knowledge of the currencies and corresponding financial markets I’m interested in. I should take into account all the factors discussed in this article when developing my trading strategy, as they all influence the performance of currencies against each other. As always, it’s recommended to test my skills with a top forex broker in Australia using a demo account before starting to trade with a live account on my chosen trading platform.
