What Are Currency Pairs and How to Trade Them

What Are Currency Pairs and How to Trade Them

A currency pair is the main trading instrument in the foreign exchange market (Forex). Trading currency pairs, which provided an opportunity for everyone to profit from rate differences, became relevant after the establishment of the Forex market, when the IMF officially allowed countries to abolish pegging their national currency to the dollar and to gold reserves.

What is a currency pair?

What is a currency pair

Currency pairs on the Forex market are sometimes called trading pairs, which is fair considering they are used for trading, i.e. to exchange one national currency for another, or more specifically, to buy a currency at the same time. price of the other.

As you can see from the word 'par', there are two assets that are written one after the other. The order in which currencies are placed in the pair carries conceptual meaning for the trading of currency pairs.

The currency unit listed first (on the left) is called the base currency. Note that there is no notion of 'base currency pairs', only base currencies and there is a base currency for each pair.

The currency listed second (on the right) is called the quote currency. This name determines the relationship between the two parts of the pair, because the currency listed first is quoted against the currency listed second.

Deciphering currency pairs is a basic skill for a new trader. EUR/USD, GBP/JPY and other symbols are sometimes called currency pair tickers, although they are not officially tickers; they are codes.

Tickers are a notion applied to other types of assets (stocks, bonds, stock indices). The tickers are essentially their short names. For example, to avoid writing to Deutsche Bank, its DBK ticker is used.

Example of calculating a currency pair

 

Example of calculating a currency pair

Euro/US Dollar is the most popular currency pair. It is correct to use EUR/USD. In the Forex market, trading pairs are written using their international letter abbreviations regulated by the International Organization for Standardization (ISO).

This was done to simplify trading so that traders anywhere on the planet would use the same denominations and always know which pair they were talking about.

For calculation purposes, let's assume that the EUR/USD rate is 1,18 (or EUR/USD = 1,18 as it is usually written in currency pairs).

To read it correctly, you need to understand the principle of forex trading, specifically that the base currency is bought by the quoted currency.

In our case, a trader buys EUR 1 for $1,18. This means that the left position in this one is the 'commodity' (euro) and the right position is the price (dollar).

The principle is apparent and appeared long before the establishment of the Forex market. For example, early modern Europeans, who only practiced bartering in kind, could exchange, for example, a flint spear for two wolfskins.

In the 'currency pair table' of that time, this type of exchange would be written as follows: spear/wolfskin = 2.

Note that the quote specified after the currency pair name (after the '=' symbol) always means the amount that must be paid in the quoted currency to buy one unit of the base currency. It's always a unit, for example a US dollar, not ten, or a hundred, always just one.

Currency pair ranking

Currency pairs on the market Forex follow a common rule — only two currency units are involved in trading, always, where one is bought and the other sold.

Other options for interaction between national currencies are impossible (there are options for exchanging money for other assets, but precious metals, for example). This is also stipulated by the ISO regulation.

We have deciphered the currency pairs above, but it is not enough to just know the relationship between the currency that is sold and the currency that is bought. You also need to understand what kind of currency pair it is, because that is what determines the trading strategy.

Today, there are three types of currency pairs in Forex trading:

  • Majors;
  • Smaller or cross coins;
  • exotic.

Let's understand the notions of 'forward' and 'inverse' currency pairs. Direct pairs are those where quotes are provided in US Dollar, New Zealand Dollar and Australian Dollar and also Pound Sterling (their currency codes are on the right side).

Inverse currency pairs are when the US Dollar, New Zealand Dollar and Australian Dollar or British Pound codes are on the left side of the quote (meaning this is the currency being bought).

Example: EUR/USD is a forward pair, USD/AD is an inverse pair.

Major currency pairs (Majors)

Os top pairs Currencies or majors are the smallest types of pairs, but they represent the majority of the total trading volume in the Forex market.

The majors have the highest liquidity indicator and the volumes of currency pairs of this type are the largest.

In other words, these are the most popular pairs and are traded by both beginners and experienced traders with a huge track record. Another small detail — these pairs always have the lowest spreads.

It is not difficult to guess that the main Forex pairs are the national currencies of countries with the most developed and stable economies.

It is currently the US, EU countries, Canada, Japan, UK, Switzerland, Australia and New Zealand. In this sense, the review of the main ones includes the main options of the relationships between the national currencies of these countries.

  • AUD / USD
  • EUR / USD
  • USD / JPY
  • GBP / USD
  • USD / CHF
  • USD / CAD
  • NZD / USD

Note that the major currency market always includes a US dollar, but it can be listed either to the right or left of the currency pair.

This means that, in these pairs, the US dollar is bought or sold, acting as the 'commodity' or its price (spear or wolf's skin).

This can be explained by the fact that the value of currency pairs on the Forex market and their relevance to traders are determined by the currency's economic positions in the global arena.

As the US dollar is currently the strongest currency in the world, it is involved in most trading on the Forex market.

Notably, brokers sometimes offer other important pairs in addition to those listed above on their platforms. It is incorrect — the list of majors can only include the names of the currency pairs we provide (a total of 7 choices).

The spread of a currency pair is the difference between the base currency's best sell (ask) price and the best bid (offer) price.

As a rule, the broker charges a spread for each trade as a form of commission; therefore, the lower the spread, the more often the pair is traded.

Low spread currency pairs are by definition on the majors list as the spreads for other types of pairs are always higher.

The spread can be influenced by a number of factors including trading instrument liquidity, trade size, market condition.

cross currency pairs

Crosses often have their alternate name—smaller (as opposed to larger). Currency pairs of this type contain combinations of the currencies mentioned above, with the exception of the US dollar.

This means that the national currencies of the EU, Japan, Canada, UK, Switzerland, Australia and New Zealand are bought and sold in this group of currency pairs.

The peculiarity of these types of currency pairs is that they also have high liquidity but a higher spread compared to majors, therefore, they are less traded and generally not as popular with traders.

However, they cannot be called less profitable per se; they are just traded differently. Here is the complete list of crosses:

  • AUD / CAD
  • EUR / AUD
  • EUR / NZD
  • AUD / CHF
  • EUR / CAD
  • GBP / AUD
  • AUD / JPY
  • EUR / CHF
  • GBP / CHF
  • AUD / NZD
  • EUR / GBP
  • GBP / JPY
  • CAD / JPY
  • EUR/JPY
  • NZD / JPY

You can memorize a phrase to avoid mixing up majors and crusades. Currency pairs that you buy or sell that involve the US dollar are called majors, and if there is no US dollar in a pair, they are called minors or crosses, naturally if we are talking about the national currencies of the mentioned countries. .

For example, if we have a US dollar/Russian ruble pair, it will not be a major pair, but it will not be a minor pair either. This pair will be among the exotic pairs.

exotic pairs

Pairs of this type include all combinations that were not included in the two previous groups, i.e. that are not major pairs or cross currency pairs.

However, there is almost always a major currency pair in exotic pairs. It is a very rare occasion when both currency units of the pair are national currencies of weak economies and developing countries.

Most often, the national currency of USA, Canada, Japan, UK, Switzerland, Australia and New Zealand and also EU countries holds one of the positions in the exotic pair.

Any other national currency holds the other position. With this, the currency of the top companies is listed as the base currency (on the left) as it is the commodity the trader is buying.

  • USD / RUB
  • USD / MXN
  • EUR/DKK

These are just a few examples of exotic currency pairs, although there are many more and it makes no sense to list them all.

However, there is a sense in saying that exotic pairs are by far the most popular Forex pairs. It is quite evident as its liquidity is lower than other types of currencies and the spread is higher.

Often, the spread of exotic pairs is floating, even if it is a stable pair. If interest in the pair increases, the spread may decrease, but this is case by case and depends on the broker's policy.

Overall, the positions in the ranking of currency pairs are as follows: major, minor and then exotic. Therefore, it stands to reason that the best pairs for beginners are those with the US dollar.

According to the latest IMF data, more than 62% of all financial reserves in the world are held in US Dollars, which guarantees the currency's top position in the Forex market.

So if a trader doesn't know which currency pairs to trade, he should start with the dollar majors — this is the ideal decision in any case.

 

How to trade currency pairs on the Forex market

If a trader focuses on currency pair spreads, the majors have the lowest spreads followed by the crosses. However, the spread is not the only indicator and the focus should not be entirely on it.

The price of the currency pair changes continuously and to trade successfully, you must follow the basic rule: buy for less, sell for more.

You can apply this rule to any country's currency. For example, you can buy Danish krone for Russian rubles and then sell it when its value increases. The question is: will it increase?

The answer to the question of which currency pairs you should trade always comes down to a simple prediction.

Using global financial news, it is entirely possible to predict, for example, that the US dollar will fall against the euro tomorrow, but it is likely to recover its positions as the situation is temporary.

So how do you predict the rate of the Danish krone against the Russian ruble? Considering that there is no major currency in this pair, it will be difficult for a trader to find even indirect indications of possible change in quotes, let alone signals from the currency pair.

This is why “weak” currencies are traded less often. There are none, or almost none. Forex signals — events or phenomena that directly indicate that quotes will change.

Most of the time, this is because the price of assets can remain unchanged for years, which means you cannot profit from them. Even Forex trackers (special software that searches for trades based on specific criteria) do not provide adequate results.

To summarize, the majors are the best Forex pairs; it is always easier to trade them and beginners are recommended to start with them.

Trading strategies, signals and market analysis principles are absolutely identical for cross and exotic currencies, but price movement is different.

The less popular the asset, the more difficult it is to predict the behavior of the currency pair, therefore, the more difficult it is to profit from it.

 

  • What are penny accounts for?

As we have already said, predictions are based on the currency pair's signals, which are recommendations to take a specific action — buy or sell the asset.

When in a trade you know the names and types of currency pairs well, you already have an idea of ​​which ones will be easier to work with.

If necessary, a trader can review the history of the currency pair they are interested in in order to understand how quotes have changed recently.

However, there is one detail. There is no universal trading strategy for trading currency pairs.

A trader can read recommendations and tips on currency pairs, diligently study global news announcements, ideally calculate the entry and exit point of trading, but if we are talking about a beginner, the risk of losing the first deposit is almost 100% .

Statistically, 90% of new traders lose their first deposit, but only because they have a bad idea of ​​trading practice.

In order to avoid significant financial losses at the beginning or even make a profit, in addition to finding profitable currency pairs and building an optimal strategy, you can use an opportunity that was a rarity not even 5 years ago, but is now offered by almost all brokers. This opportunity is a cent bill.

A cents account is identical to the standard account, with one difference — settlements on it are carried out not in dollars, but in cents.

Specifically, when entering a position on EUR/USD, you are not buying euros, but euro cents, and not for dollars, but for dollar cents.

Knowing what a currency pair means in trading and being prepared to trade, a new trader can work with real quotes and real money, but using a cents account, which means that losses from losing trades will be calculated in cents and tens. of cents and not dollars and tens of dollars.

It's a kind of training method, honing your trading skills in the field.

  • Other Methods to Make Forex Trading Simpler

The answer to the question of which currency beginners should trade is self-evident — one of the main ones.

It is best to start with a penny account, but it is not the only mechanism that provides an opportunity for traders to gain a quicker understanding of the characteristics of currency pairs and learn the fundamentals of trading.

For example, in the Forex market, there is a possibility to divide the traded lot into hundredths.

In this case, you can trade 0,01 lot and not the total lot of $100.000. And this value seems more realistic to a new trader.

Leverage is another opportunity. Using leverage, a trader can open a position using funds borrowed from the broker to increase the trading position.

For example, with a leverage of 1:100 and a deposit of $100, a trader can work with an equity of $10.000.

Consequently, the profit will not be made from $100, but from $10.000. Leverage allows new traders with small deposits to earn some real money in Forex trading.

  • Forex's Biggest Flaw or Let's Talk Spread Again

We have already determined what the spread is and now let's see how to calculate it. It is important because the trend of currency pairs, currency pair indices and other important aspects alone will not allow the trader to make a profit if he/she does not understand how spreads 'work' and because the spread is considered a failure of Forex.

As an example, one can take the British pound and the Japanese yen, so the successful prediction of the currency pair from the crosses is entirely realistic.

With this, the spread can be 45 pips in a short time of 1 minute. The broker takes this difference between the order and the offer as a commission.

A clearly high spread is a problem for a broker, because he buys the position based on the buy and sell order — on the offer. And if the currency pair moves in the wrong direction, it can cause serious losses. As a result, the real risk of return is not 1:3, and not even 1:2.

A currency pair is the main trading instrument in the foreign exchange market (Forex). Trading currency pairs, which provided an opportunity for everyone to profit from rate differences, became relevant after the establishment of the Forex market, when the IMF officially allowed countries to abolish pegging their national currency to the dollar and to gold reserves.

Bucket shop is an expression used to describe a brokerage that executes orders on behalf of the client, promising a specific price, but usually executing them at a different price and making a profit on the difference.

Talking about Forex market failures, we just have to mention Bucket shop Forex. It doesn't matter how you pick bullish currency pairs, how you analyze them and what advisors say.

Here, you trade not with the interbank, but with the broker. The broker sets its own quotes and it is impossible to win there. There are many versions of bucket shops, but they all boil down to one thing — traders will never make a profit there; they only lose their deposits one after the other.

That's why it's important to work with a broker reliable and regulated by the competent authorities. Finding such a broker is very easy — just use our website's independent rating.

What are the currency pair trends in the Forex market?

There are three trends in the Forex market — bullish (upwards), bearish (downwards) and flat or horizontal (sideways).

An uptrend is characterized by a rising price of an asset over a long period of time.

During a downtrend, the asset price is decreasing for a long period of time.

Flat movement is when the price does not rise or falls considerably over a long period of time. As a rule, a flat trend is preceded by a pronounced trend.

The most trending currency pairs are the ones that match the trend at the moment.

However, you need to understand that the definition of the “most trending currency pair” is quite tentative as it depends on a number of other factors, for example the timeframes you work on.

For short timeframes, long trends can be uninformative and simply meaningless (here, you need to find good currency pairs for the scalping).

Timeframe is a time frame for grouping price quotes of a trading instrument. Price movement forms based on the minimum elements of the time frame (most often these are bars).

On the MT4 platform, you can choose time intervals from 1 minute to 1 month. Clearly, different market trends impact different timeframes differently.

Usually, the currencies of two countries, which currently do not show a clear trend towards each other, are called fixed currency pairs (or stable currency pairs).

Experts say that a consolidation of currency pairs occurs when demand balances supply. The Forex market is on average 80% consolidating; therefore, most trading takes place in the side range of the chart.

To make a profit on these pairs, you need to work on small time intervals, predicting changes in quotes for a short period of time.

However, you need to understand that the notion of a 'stable currency pair' is very tentative, because no trading instrument is always trending or stagnant.

To see more clearly, you can compare a daily chart and a weekly chart of any pair.

On the weekly chart, the width of the flat can be, for example, 900 pips, and on the daily chart — 80 pips and less. This means that the weekly plan actually becomes a trend chain for intraday traders. Be that as it may, there are usually “more fixed” and “more trending” currency pairs:

  • All the minors are the most stable pairs, that is, the pairs that spend most of their time in the sideways market.
  • All major currency pairs are the most popular pairs. Unlike flat currency pairs, these spend most of their time in trends.

Throughout the history of the Forex market, the Australian dollar/New Zealand dollar has been recognized as the most stable currency pair.

As for the most trending currency pair, it depends on the session — GBP/JPY for the Asian session, GBP/CHF for the European session.

How currency pairs work — liquidity and volatility

How currency pairs work — liquidity and volatility

 

Liquidity in the Forex market is a criterion that shows the volume and activity of trading a specific financial instrument, the proportion of the chosen currencies in our case.

In practice, it is the ability of an asset to be traded (bought and sold).

Best currency pairs for liquidity trading:

  • EUR/USD — 28% of all Forex trades
  • USD/JPY — 13% of all Forex trades
  • GBP/USD — 11% of all Forex trades

The most liquid pairs on the Forex market are distinguished by three indicators: lower spread, faster order execution speed and rare drawdowns.

A currency pair is the main trading instrument in the foreign exchange market (Forex). Trading currency pairs, which provided an opportunity for everyone to profit from rate differences, became relevant after the establishment of the Forex market, when the IMF officially allowed countries to abolish pegging their national currency to the dollar and to gold reserves.

Drawdown means drawdown in English. Generally, the term Drawdown can be used in asset analysis, when it is evaluated how far the investment can fall.

Note that these are not the most predictable pairs; they are the most popular pairs among traders. And they are marketed by beginners and professionals alike.

The volatility of currency pairs is the rate at which their price changes. All Forex pairs are volatile, which means that the prices of currencies in a pair continually change with each other.

There are no static national currencies and that's the point of the money market. Asset volatility and liquidity are co-dependent characteristics — highly volatile currency pairs are less liquid and vice versa, the higher the liquidity, the lower the price range in which quotes change.

Less liquid assets (less demanded by traders) always react faster to change in bid/ask.

The average volatility of currency pairs depends on many factors, including global political and economic factors, as well as industry. At platforms brokerage firms often present indicators of currency pair volatility.

These indicators can perform the calculation in two ways:

Moving Averages

  • It is a measure of the average movement of the market over a selected period of time. A typical example is applying a 20 SMA setup to a price movement chart.

bollinger bands

  • Bollinger bands are two bands on the chart and two deviations. When bands contract, volatility decreases, when they expand — volatility increases.

More volatile currency pairs carry greater risks. So, for careful and sensible trading, a trader evaluating his deposit chooses currency pairs with low volatility, as fluctuations of 20 – 30 pips are easier to survive with a small deposit than fluctuations of 100 pips and more.

On the other hand, the greater the volatility, the greater the potential profit. Therefore, every participant in the Forex market needs to know how to determine the volatility of the currency pair, as this factor is taken into account when calculating the risks.

The easiest way is to use the average volatility tables for currency pairs, which are regularly published by good brokers.

It is difficult to name the most volatile currency pairs at the moment because this indicator changes regularly for all assets. Historically, the list of the 5 most volatile Forex pairs includes:

  • GBP / NZD
  • GBP / AUD
  • GBP / CAD
  • EUR / NZD
  • GBP / JPY

On average, the quotes of these national currencies (and the relationship between them) change more frequently and are stronger than the others.

  • Mirror pairs and correlations

Mirror pairs in the Forex market are those pairs that move in diametrically opposite directions on the chart, or vice versa — synchronously.

This means that the price on one chart is moving downwards, and on the other — upwards using the same principle (or also downwards if the movement is synchronous).

Of course, totally identical moves are impossible, but that's the trader's skill—seeing similarity in the chart, nonconformity, which cannot exist.

Mirror assets interact based on the correlation principle. Correlated currency pairs are important for trading because changes in quotes for one pair allow you to predict changes in the other. There are two types of correlation:

  • Negative

These are the mirror currency pairs (the pairs that are opposites on the charts).

  • Positive

This is a situation where currency pairs move in the same direction and all changes are approximately doubled.

Major currency pairs by liquidity and volatility

Virtually all books on currency pair trading recommend starting with the euro and the US dollar. It is logical advice, because EUR/USD is the most liquid pair among all types (majors, crosses and exotics).

On the other hand, saying that EUR/USD is the most predictable pair is wrong, because this pair has quite high volatility — around 750 pips a day, which significantly increases the risks. However, the pair is undoubtedly the leader in terms of liquidity/volatility.

The pair of the US dollar against the Japanese yen, as a rule, occupies the second place in the list of the most suitable pairs for beginners.

Liquidity is extremely high and there are many reasons for this, including a strong US economy, an atypical economic model for Japan, sanctions against Japan after WWII, etc. However, the volatility of this pair is even higher than the previous pair — around 1.300 pips a day.

The third place is occupied by the pound sterling against the US dollar. The GBP/USD pair accounts for 9 – 11% of all trades on the Forex market.

In addition, this is the most volatile pair on the Forex market — its quotes can reach 1.390 pips a day, which is due to the popularity of the US dollar, and the high price of the pound sterling, one of the most expensive national currencies in the world.

A currency pair is the main trading instrument in the foreign exchange market (Forex). Trading currency pairs, which provided an opportunity for everyone to profit from rate differences, became relevant after the establishment of the Forex market, when the IMF officially allowed countries to abolish pegging their national currency to the dollar and to gold reserves.

Observation:

Volatility does not indicate the average movement of a currency pair during the day, nor the total number of pips traveled by quotes either up or down. This is the number of pips from maximum peak to absolute minimum in a trading day.

Currency pairs summary

Now you know how to read currency pairs, how their liquidity and volatility are determined, what is the correlation of currency pairs. Combined with knowledge of the basics, this is enough to start trading using a demo account bill or cent.

In a penny account you use real money and in a demo account you use virtual money, while trading the real quotes and instruments.

As a rule, new traders start with a demo account, switch to a cents account, and then to the standard dollar account.

Which broker should a new trader choose? This is not an easy question, but the ranking of Forex brokers for beginners will help you answer it.

After choosing the broker, a trader registers on the broker's website, installs a trading platform, makes the first deposit and starts testing his strategies in practice.

The most important thing to remember is that there is no established notion of the “most profitable currency pairs”. You can profit from the Forex market professionally with any currency pairs, majors, crosses and exotics, but this usually requires many years of experience.

A currency pair is the main trading instrument in the foreign exchange market (Forex). Trading currency pairs, which provided an opportunity for everyone to profit from rate differences, became relevant after the establishment of the Forex market, when the IMF officially allowed countries to abolish pegging their national currency to the dollar and to gold reserves.Cryptocurrency exchange frequently asked questions

 

What is a currency pair in simple words?
A currency pair is made up of two national currencies of different countries, one of which is bought at the price of the other. The example of a currency pair is EUR/USD. This means that the euro is bought for the US dollar. After the currency pair code, its quote is written, for example EUR/USD = 1,18. This means that 1 euro is bought for $1,18.
What is liquidity and volatility of a currency pair?
What is liquidity and volatility of a currency pair? Liquidity is the asset's trading volume; it is essentially the demand for the asset on the part of traders. The most liquid currency pairs include EUR/USD, USD/JPY and GBP/USD. Volatility is a measure of how strongly prices change, i.e. the difference between the maximum price and the minimum price in a trading day. The most volatile pairs include GBP/NZD, GBP/AUD, GBP/CAD.
What are the most traded currency pairs? What are the best pairs for new traders?
The most traded currencies are the so-called majors, which include EUR/USD, USD/JPY, GBP/USD and several others. Crosses are ranked second; these are the same national currencies that are on the top bond list but without the US dollar, eg EUR/CHF, EUR/JPY, NZD/JPY. It is best for beginners to start with the larger ones and try the crosses later if desired. The third group of pairs (exotics) is not recommended for novice traders (they are all other currency pairs, which are not included in the first two groups).
Where do I trade currency pairs?
Anyone can start trading currency pairs on the Forex market. For this you need to select a broker, open an account, make a deposit and install a trading platform. 

 

 

 

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