The foreign exchange (Forex) market is the largest financial market in the world. With a daily average volume of about $6.6 trillion and worth over $2.4 quadrillion as of 2021, forex is a decentralized global market for trading currencies.
All trading in the forex market is done with currencies in pairs. The process involves you buying one currency and selling another with the goal of making a profit through their price differences. As of now, there are over 170 currency pairs in the forex market.
Since the entirety of forex trading is based on the buying and selling of currency pairs, it is necessary to have an in-depth understanding of them and how they work in order to start forex trading. Let’s take a look:
What is a currency pair?
A currency pair involves two different currencies, often separated by a forward slash (‘/’), in which the value of the first currency is quoted against the value of the second currency.
In Forex, currencies are written in pairs to compare the value of one currency (generally, the base currency) to another currency (the international currency). It indicates how much of one currency is required to buy a single unit of the other currency.
What are base and quote currencies?
Base currency: It is the first currency that appears in a forex pair.
Quote currency: It is the second currency appearing in a forex pair.
For example, if we take EUR/USD, the value of EUR will be quoted against the value of USD. This depicts how much USD is needed to purchase 1 EUR.
Forex traders buy the base currency and sell the quote currency in exchange. Similarly, you can buy currency pairs from different countries and also sell them in the forex market. You can also convert them for international investment and trade.
What are the bid and ask prices?
Currency pairs have exchange rates that are based on their bid and ask prices.
- The bid price, also known as buying price, is the amount a broker (buyer) is willing to accept in exchange for a currency or asset.
- The ask price, also known as the offer price, is the amount a trader (seller) is willing to accept in exchange for a currency or asset.
- The difference between the bid price and the ask price of a currency pair is called a spread.
Let us look at an example with GBP/USD. Let’s say you want to exchange GBP for USD. The exchange rate is 1.5, which means that one unit of USD is equal to 1.5 units of GBP, or $1 is required to purchase £1.5. In this case, GBP is the base currency, and USD is the quote currency.
If 1 GBP = 1.3 USD / 1.5 USD, that means that the higher USD price ($1.5) is the cost of purchasing a single GBP. If you wish to sell the GBP you already have, you can sell it at the lower price of $1.3.
How do currency pairs work?
Whenever you buy a currency pair, you use the base currency in order to sell the quote currency. However, you sell the base currency and get the quote currency in return when you sell the currency pair.
As per our example above, consider the currency pair price of GBP/USD = 1.5/1.6. Here, 1.5 is the ask price, and 1.6 is the bid price. In order to buy a unit of GBP, you will have to pay 1.6 USD. However, if you wish to sell GBP, you will receive 1.5 USD.
You may buy this currency pair if you have a notion of GBP increasing in value against USD in the future. Buying the pair means going long, whereas selling the pair means going short. The pair will be sold if you believe GBP will weaken against USD.
Types of Currency Pairs
Major currency pairs
The major currency pairs are the most liquid and heavily traded among all currencies. There are 7 major currency pairs in the forex market:
- EUR/USD
- GBP/USD
- USD/JPY
- AUD/USD
- EUR/GBP
- USD/CAD
- NZD/USD
Minor/cross currency pairs
The currency pairs that include major currencies except the US dollar are called minor or cross currency pairs. These minor currency pairs are less liquid than major currency pairs. They include pairs like EUR/GBP and EUR/AUD.
Exotic currency pairs
Exotic currencies include one major currency while the other currency belongs to a developing country. These include pairs like GBP/ZAR and AUD/MXN.
Top most traded currency pairs
EUR/USD
One of the most traded currency pairs is EUR/USD, which is also considered as one of the best currency pairs to trade for beginners due to its high liquidity in the market. The currency pair represents the world’s top two biggest economies, the European market and the United States of America.
It has an average trading volume of $265,241 (50 days). Due to its large daily traded volume, the pair trades with tight spreads and high liquidity.
GBP/USD
GBP/USD is one of the most popular forex pairs that represents the UK’s Pound Sterling and US’s Dollar. This currency pair makes for over 11 percent of forex transactions with an average trading volume of $350,000.
USD/JPY
USD/JPY is one of the most liquid currency pairs to trade made, which includes the US Dollar and Japan’s Yen. It is also one of the most traded FX currency pairs, with an average trading volume of $338,629.
AUD/USD
AUD/USD, is one of the top forex pairs, representing the Australian and American economies. It is a strong currency pair with an average daily trading volume of $233,316, with around 48.81 percent of retail traders having this currency pair in their portfolio.
EUR/GBP
EUR/GBP is one of the best pairs to trade as it represents the Euro against the British economy’s Pound. The currency pair is a strongly traded one but also has its own complications due to the historical link with respect to trade and proximity between the two economies.
How to trade currency pairs?
- Open a forex account
To start trading forex, you need to first open a forex account with a regulated forex broker. Look for a broker that offers quick withdrawals, tight spreads, leverage, and 24/7 support. - Devise a trading strategy
A trading strategy should include your trading goals, objectives, timelines and everything that you need to follow as a forex trader. It will act as a helpful tool for assisting you in future trades. - Choose the currency pair you want to trade
There are hundreds of currency pairs that you can trade. The goal should be to choose a currency pair that is stable and suits your trading strategy. - Open your first position
After deciding which currency pair you want to trade, open your first forex position by buying a fixed number of units of the currency pair you want to. You can choose to go long or short. After you place the order, the forex broker initiates the transaction and money is deducted from your account. Then you receive the forex in your trading account. - Monitor your trades
Monitor the currency pair and the overall forex market after you have made your first trade. Look for market trends as they will help in providing you with ideal price levels to enter or exit the market. - Close the position when needed
If you have realized the profits you wanted, or the market starts moving against you, it is time for you to close your position. Ask your forex trader to put the amount on their system at which you want to close the trade. Once the broker follows your instructions, the forex from your trading account is deducted, and you receive the payment in your bank account.
Tips for trading currency pairs
- Always study the economies of the currency pair you want to trade. Understand the economy’s political stability, economic condition, and financial soundness before investing in its currencies.
- Leave your emotions aside while trading currency pairs and only focus on the technical analysis.
- Diversify your portfolio by adding all three kinds of currency pairs in it: majors, minors/crosses, and exotics.
- Select a currency pair after studying its market volatility, liquidity, and average daily traded volume.
- If you are a beginner trader, start with a single trade and only monitor that trade closely instead of getting into multiple trades at once.
- Use leverage in forex trading to gain a larger exposure to the market by depositing a small amount and trading bigger positions.
- Keep a close eye on market trends so that you can enter or exit a forex position at the right time.
- Use more than one technical indicator to confirm the price analysis, and only make decisions after the trend is confirmed.
- Maintain a strict stop-loss level to avoid potential losses during times of high volatility and economic crisis.
- Keep a close eye on news announcements since timely economic and financial news can help you make successful trading decisions about the currencies of those economies.
Trade Forex with Blueberry today
Currency pairs are an important part of forex trading. Beginner traders must understand them completely before entering the market. With the proper research about the different country’s conditions and economic situations, a trader can make well-informed decisions in the market.
With Blueberry, you can trade a vast number of currency pairs with complete reliability, scalability, and transparency.
Sign up for a live trading account or try a demo account.