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| 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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