Currency Pair

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21 Aug, 2024

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A currency pair is a combination of two different national currencies valued against one another. Its purpose is to compare the value of one particular nation’s currency to another. They are available to trade on the foreign exchange (forex) market, one of the most liquid financial markets in the world.

Unlike stock exchanges, the foreign exchange market is open 24 hours a day, five days a week. The market is only closed Friday evening through Sunday evening. Since traders from all over the world exchange currencies on the market, having 24 hours allows individuals to participate despite time zone differences.

Currency Pair Meaning

A currency pair is a combination of two currencies their values compared against each other.
Trading currencies involves twos - when a person buys one, they are selling the other. If they want to buy the EUR/USD pair, they buy the Euro and sell the U.S. Dollar.
Major currency pairs will be easier to buy and sell as they are more liquid. Minor pairs are less liquid and harder to sell as they are not correlated to the U.S. Dollar.
Several factors will affect the price of currencies, including economic and political elements.

How to Read a Currency Pair in Forex?

Currency pairs are written as a forex quote consisting of two separate currencies. The first in the forex currency pair is always the base currency, whereas the second currency is the quote currency.

One can identify a currency from its currency code which is in three letters. The code typically consists of the first two letters representing the country, and the third being the actual currency. So, for example, the U.S. dollar is represented as USD, and the Euro is represented as EUR.

When purchasing a forex currency pair:

The first currency (the base) is what a person is buying effectively.
The second currency (the quote) is the one they are selling against.

The price in the code reveals how much of the quote currency it would cost to purchase the base currency. For example, a standard quote pair would display as follows:

This instance implies that you can purchase 1.2055 Euro for 1.2057 U.S. dollars. The first price is the bid price, and the second set of numbers is the ask price. The bid is the price the dealer would pay for the currency, and the asking price is what they would be willing to sell it.

The difference between the bid and ask price is the bid-ask spread given in units called pip or the fourth decimal point out.

Buying a Currency Pair

Buying a forex currency pair is pretty much like buying a stock. When purchasing stock, a person exchanges a currency, such as the U.S Dollar, for either a share of a business or a commodity. When buying a currency pair, they buy one currency in exchange for another one. If they buy the U.S. Dollar, they are selling the Euro and vice versa.

One can group it into major and minor currency pairs.

Major Currency Pair

There are four major currency pairs and these are the most popular and heavily exchanged pairs on the foreign exchange market.

EUR/ USD
GBP/ USD
USD/ JPY
USD/ CHF

The U.S. Dollar is by far the most heavily traded currency being on 88 percent of all trades in 2019. Euro follows the U.S. Dollar by being on 32 percent of transactions, and the Japanese Yen is on 17 percent.

There is also a group of three currency pairs called commodity pairs that many associates with major pairs. They are:

USD/ CAD
AUD/ USD
NZD/ USD

Instead of buying commodity stocks, traders can exchange for a commodity pair. These are from nations with a currency significantly tied to fluctuations in commodity prices.

Minor Currency Pair

On the other hand, one does not trade minor currency pairs against the U.S. Dollar. As a result, these are typically less liquid than major pairs and may experience bigger spreads.

Here are a few examples:

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

There are also exotic currency pairs. These include a major currency paired with one from a developing economy, like Singapore or South Africa. A few examples are:

EUR/ TRY
GBP/ ZAR
NZD/ SGD
USD/ HKD

Exotic pairs will be less liquid, and spreads can be significantly wider.

How to Trade Currency Pairs?

People exchange currencies for various reasons including speculation, tourism, international business, and hedge fund risk. When trading currency pairs, a person simultaneously sells one currency to buy another. Here it is like trading stocks in many ways. For example, we are looking to find value by utilizing technical & fundamental analysis, and it takes a fair amount of discipline to make a profit.

Technical Analysis

Making technical analysis involves looking at past movements in price to identify trends to help predict future price action. Forex traders will look for specific support levels where buyers have stepped in and bid up the price. They will also look at levels of resistance, where prices tend to decline.

An individual can use a host of different resources to assist themselves in technical analysis, including indicators, various study tools, and applying moving averages.

Fundamental Analysis

Fundamental analysis involves analyzing a country's economic data and upcoming catalysts that could change lead to price changes. Therefore, a person should look at strong fundamentals as a positive factor in the value of a currency.

There are specific data points investors will look at that can affect currency prices. A few of these include:

Interest Rates
Inflation
Debt
Supply & Demand
Trade Balance
Economic Growth

Trading currency pairs starts with having a plan and a set of rules to keep one disciplined while trading. For example, knowing when and how to exit a trade is just as important as knowing when to enter one in most cases.

It’s best to document their trading journey and take note of what they did on both winning and losing trades for study and reference.

Frequently Asked Questions (FAQs)

What are currency pairs?

A currency pair is the listing of two different currencies, their values quoted against each other. The first currency in the pair is called the base currency, the value of which is quoted against the second currency or quote currency.

What are major currency pairs?

The major currency pairs are the most widely used on the forex market. They are EUR/USD, USD/JPY, GBP/USD, and USD/CHF. They are extensively traded worldwide, contributing to a significant number of economic transactions.

How do currency pairs work?

Currency pairs compare the value of the base currency to quote currency. The currency code indicates how much quote currency is required to purchase the base currency. The first price listed is the bid price, and the other is the ask price. When buying a currency pair, a person buys one currency in exchange for another. The difference between the bid and ask price is called a spread indicated by pips.