What is currency pair in forex trading? Here is a simplified explanation for your perusal.
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Remember that forex trading has to do with the buying and selling of currencies?.
Forex, which fully means foreign exchange, is a form of digital trading where traders exchange currency pairs.
In the forex market, you can buy the United States Dollar with the Swiss Franc (USDCHF). Also, you can decide to buy the Great Britain Pound with the United States Dollar(GBPUSD) and many more.
However, these currencies are often quoted in pairs in the forex market.
What is a currency pair?
A currency pair is a price quote for any two currencies that traders exchange in the financial market. Usually in pairs, the first is called the base currency, while the other is the counter currency. For example in the USDJPY currency pair, USD is the base currency while JPY is the counter currency.
This price quote often contains two different prices which are: the asking price and the bidding price.
The asking price is the price at which a trader can buy. The bid price is the price at which a trader can sell a currency.
A currency pair helps to give more information about the exchange rate between two currencies.
As explained above, this currency pair is always of two currencies which are: the base currency and the counter currency.
The base currency is the currency that a trader is willing to buy after selling the counter currency. It is the basis for a buying transaction.
Then, a counter currency is a currency that a trader is willing to sell in order to buy a base currency.
Now, let us take a quick illustration:
A trader decides to go long(buy) on the GBPUSD pair at a price of 1.25500, what does this mean?
This means that he wants to sell the United States Dollar(USD) to buy the Great Britain Pound(GBP).
Types of Currency Pairs.
Currency pairs are of different types, which include: the exotic pairs, the cross pairs, the major pairs, and the minor pairs.
Exotic pairs are currency pairs that contain the four major currencies which are: the Euro(EUR), the Great Britain Pound, the United States Dollar(USD), and the Japanese Yen(JPY).
Examples of exotic pairs include EURUSD, GBPUSD, AUDUSD, USDCHF e.t.c.
The cross pairs are currency pairs that do not contain the United States Dollar(USD). Examples of cross pairs include AUDCAD, EURJPY, and so on.
Major currency pairs are the currency pairs that traders trade actively. They are EURUSD, USDJPY, USDCHF, GBPUSD, AUDUSD, and AUDCAD.
Minor currency pairs are currency pairs that traders do not trade often. They include the United States Dollars and the South African Rand(USDZAR), Euro and the Norwegian Krone(EURNOK), and so on.
In addition, these currencies have nicknames that traders use in referring to them. Here is a list of currencies with their nicknames.
- AUD – Australian Dollar – Aussie.
- CAD – Canadian Dollar – Loone.
- CHF – Swiss Franc – Swissy.
- EUR – Euros – Euro.
- GBP – Great Britain Pounds – Cable.
- USD – United States Dollars – Duck.
- NZD – New Zealand Dollar – Kiwi.
- JPY – Japanese Yen – Yen.
Now, take a look at how some of them look in pairs:
- NZDCHF, and so on.
Furthermore, these currency pairs have favourable trading sessions that traders trade them specially. The most important periods of these sessions are the start and the end of the sessions.
The sessions include the European session, the American session, and the Asian session.
- When is the best time to trade forex?
- a list of the best currency pairs to trade in forex
- 5 Most Predictable Currency Pairs in Forex
The importance of a currency pair.
A currency pair helps in providing the exchange rate of the quoted currencies.
Furthermore, a currency pair helps traders to calculate a spread. A spread is a difference between the asking price and the bid price.
It is even safe to say that without a currency pair, one cannot exchange a given currency.
Once again, a currency pair is a price quote for two currencies that traders exchange in the forex markets.
Examples of currency pairs include EURUSD, EURJPY, USDJPY, USDCAD, AUDUSD, GBPUSD, USDSGD, and so on.
There are different types of currency pairs and they include the major, the minor, the exotic, and the cross-currency pairs.
Lastly, remember that the forex market has rules. If you have not understood the basics of the fundamental and technical analysis of the market, do not trade.
I hope this article has aided your understanding of what a currency pair is.
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