Currency pairs are the most common form of trading, and Forex trading is always done in pairs. When you trade in pairs, you buy the currency in exchange for another currency. The first currency in the pair is known as the base or quote currency. The second currency is known as the counter currency. For Example, if you trade the GBP against the USD, you are purchasing the GBP at the expense of the US dollar. The profit or loss is usually expressed in the value of the secondary currency. For Example, in the GBP/USD pair, GBP is the base currency, and the USD is the quote currency. A GBP/USD quote of 1.3500 means you need 1.3500 US dollars to buy 1 British Pound.
Factors to Consider when Trading a Currency Pair
There are many factors to consider when trading Forex Currency Pairs. Among them are the volatility and the economic and social factors influencing the currency. High-volatility currencies are more prone to slippage. Important events in the world, like news releases, data leaks, or privacy breaches, can have a major impact on the volatility of currency pairs. It is essential to keep abreast of these events by using the economic calendar.
Currency pairs are like stocks: they represent the economies and political situations of the issuing nations. It is important to conduct a fundamental analysis of two countries before trading them. To explain further, the currency is a stock of the nation that issued it, so reading up on its politics, economy, and imports and exports will help you decide whether to invest in the pair.
The most popular Forex currency pair is the EUR/USD. The EUR/USD is the most liquid and cheapest. It tends to correlate positively with the USD/CHF and GBP/USD and is relatively easy to trade. The right trading strategy can help you profit from the currency pair regardless of the currency pair.
The first factor to consider when determining which currency pairs to trade is your risk tolerance. Beginners should stick with stable, lower-volatility pairs. However, if you have some experience in trading, you can trade volatile currency pairs, which give larger profits. You should also consider the availability of liquidity and the knowledge of specific currencies.
Types of Currency Pairs
In general, there are three types of currency pairs: major, minor, and exotic. There are also many other types of currency pairs.
Major Currency Pairs
Major currency pairs include the US dollar and most of the other major currencies. There are a total of 7 major currency pairs: the EURUSD, GBPUSD, USDJPY, USDCAD, AUDUSD and NZDUSD. These pairs have the greatest liquidity and the lowest brokerage costs. The major currency pairs offer low spread, which helps to reduce the trading cost.
Minor Currency Pairs
A Minor or a cross-currency pair does not include the US Dollar. Instead, it has one of the other three strong currencies: the EUR, GBP, and Japanese Yen. An example of a minor currency is EURJPY. Minor currency pairs are not as popular as majors, and they are more volatile. The spread and trading cost of the minor currency pairs is generally higher than the major currency pairs.
Exotic Currency Pairs
Exotic currency pairs, however, include a currency from a developing economy. Exotic currency pairs are more volatile than major and minor pairs and have higher spreads. USD/SGD is an example of an exotic currency pair. The trading cost of the exotic currency pairs is also very high. These pairs can offer high returns, but their volatility and liquidity are much lower than the majors, so trading these pairs also brings high risk. You should be aware of these differences before trading.
When trading currencies, you should ensure that the broker offers a wide range of pairs. Some Forex brokers offer more than 40 pairs. You should always check your broker’s spreads before trading. In addition, make sure to do your due diligence and use technical analysis to find the best trading options for you.