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Beginner

Venturing into Forex for the first time?
Explore the basic concepts of buying and selling.

What is a Currency Pair in Forex?

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 decentralised 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.

  • Some of the most traded currency pairs include EUR/USD, USD/JPY, and GBP/USD.
  • One of the most profitable currency pairs to trade is EUR/USD.
  • The most fluctuating currency pair is AUD/JPY.

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.

The value of the base currency is quoted against the value of the quote currency.

EUR to USD Conversion graphic EUR to USD Conversion graphic

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.

What are the major currency pairs in Forex?

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

The other types of important currency pairs are as follows:

  • Minor currency pairs are currency pairs that do not include the USD. They are also called cross-currency pairs. Some examples are EUR/GBP, EUR/AUD, GBP/JPY, and more.
  • Exotic currency pairs are a little tough to find since they include a major currency like the USD and a currency belonging to a developing country. Some of the exotic currency pairs are USD/HKD, AUD/MXN, GBP/ZAR and more.

How do you trade currency pairs?

Here is a stepwise guide on how you can trade currency pairs:

  • Open a Forex account
    Once you open a Forex account with Blueberry Markets, you can deposit the funds and start trading currencies.

  • Choose a currency pair
    There are more than 170 currency pairs you can trade, which includes major, minor, and exotic pairs.

  • Develop your Forex trading strategy
    It is essential that you devise a Forex trading strategy before opening a position in a market.

  • Be updated
    Read Forex market news and analysis on a regular basis and stay updated by following the latest economic announcements.

  • Manage your risk
    Mitigate your Forex risk by putting stop-loss orders wherever necessary, as this helps protect your position in case of unfavourable trends.

Trade Forex with Blueberry Markets 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 Markets, you can trade a vast number of currency pairs with complete reliability, scalability, and transparency.

Sign up for a trading account today to get started.

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