How to understand currency pairs in forex

Currency Pairs

Before going to trade in currencies you must understand currency pairs. they are most popular in forex trading. But sometimes it surprises me how traders want to trade forex while they still don’t  know about currency pairs why I surprised because I taught many advanced forex traders in my trading classes and  they  are previously  trading from many years. We wouldn’t have a Forex market if we weren’t able to compare the value of one currency with the value of another currency. It is this comparison that drives prices. Forex contracts are always quoted in pairs.

What are Currency Pairs ?

They are foundation of forex trading they are paired up and then compared. The first currency listed in the currency pair is called the base currency and the second currency is referred to as the quote currency, or sometimes counter currency. If it is required to buy one unit of the base currency by above mentioned rate For example,  GBP / USD = 1.6567 indicates that you can buy one unit of pound by 1.6567 US dollars. When selling a currency pair, the exchange rate shows how many units of the quote currency you will receive when selling one unit of the base currency.

The bid price is the rate that your broker is willing to pay for the currency pair in other words this is the rate you receive if selling to the market. The ask price is the rate at which your broker is willing to sell and represents the rate you must pay to buy the currency pair. The bid price is always less than the ask price because brokers pay less than they receive for the same currency pair. This difference – known as the spread– is how your broker generates much of its revenue.

The illustration at the top of this line shows how brokers typically display a currency pair to show the current bid and ask price. In this example, the bid is 1.3272 dollars to each euro, while the ask is 1.3276 dollars to each euro.

What are the Major Currency Pairs

Major currency pairs are  involving the US Dollar. The euro versus the U.S. dollar (EUR/USD) is the most heavily traded currency pair. The U.S. dollar versus the Japanese yen (USD/JPY) is another popular pair. These pairs are the most traded and therefore the most liquid. In addition all seven of these pairs have the US dollar as one of the currencies in the pair. The US dollar accounts for over 95% of Forex trades in the market. The seven most commonly traded currency pairs can be grouped into  “Majors”.

What are the Cross Currency Pairs

They do not include the US dollar are commonly referred as Cross Currency Pairs. And some of them move very slowly and trend very well and other move very quickly and extremely volatile. With average movements exceeding 100 pips. Many of these currencies have a higher swap value. Swap is a credit or debit as result of daily interest rates when traders hold positions over night, they are either credited or debit interest based on the rates at the time.

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