Currency Pairs in Forex: The Beginners’ Guide
You may have asked yourself questions such as: why are currencies quoted in pairs? What are the most profitable pairs? And the most volatile? We will explain everything you need to know about currency pairs in the Forex market in this article.
As you may already know, the foreign exchange market (Forex) is the oldest and most liquid that exists. Professional traders prefer this market because of its trading conditions (low spreads due to its high liquidity). Its possibility of trading 24 hours a day, ease of analyzing price movements makes it unique. However, to be successful, it is necessary to know the currency pairs in Forex.
What is a Currency Pair in Forex?
A currency pair is nothing more than an exchange ratio between two currencies. It is the way to set the prices of currencies in the Forex market.
Let’s take an example of how currencies are grouped in pairs. One United States dollar (USD) equals 1.4 Canadian dollars (CAD), according to the currency market at the moment. It is expressed as follows: USD/CAD = 1.34.
We could translate it as follows: the first currency of the pair is called the base currency. The second currency is called the quoted currency or counter currency. One unit of the base currency is equivalent to 1.3194 units of the quoted currency. The Forex market sets the number of exchange units.
Another example: EUR / USD = 1.3, One euro is exchanged for US $ 1.13.
What Are the Most Common Currency Pairs?
The most common currency pairs are as follows:
- EUR/USD (Euro Versus United States Dollar)
- GBP/USD (British Pound Versus United States Dollar)
- USD/JPY (United States Dollar Versus Japanese Yen)
- USD/CHF (United States Dollar Versus Swiss Franc)
These pairs are called “majors.” They establish a crossing of the four main currencies (EUR, GBP, CHF, and JPY) with the United States dollar (USD).
The US dollar is considered the reference currency, the “queen currency.” For this reason, the USD intervenes in all major pairs.
Most Profitable Forex Currency Pairs
Each of the currency pairs has its characteristics and personality. Some of them are profitable because they present more sustained trends. Others are more volatile in the short term. In general, majors are considered the most operable due to their liquidity and stability.
The following are considered the best Forex currency pairs:
The Most Volatile Currency Pair
The GBP/JPY has great volatility due to the correlation existing between the GBP/USD and USD/JPY. It is a highly unstable pair. It tends to have unpredictable movements and increase volatility unexpectedly. GBP/JPY is a difficult asset to tame, and yet it can be very profitable.
When Can You Trade Currency Pairs on Forex?
The Forex market is not centralized. It does not have a single place for currency trading. That’s why it remains open 24 hours a day, from Monday to Friday.
Thus, any trader can access the Forex market either in the Asian, European or American sessions, except on weekends.
And so far, here is everything about currency pairs. This article contains some basics you need to know about the forex market. Did you know some of these peculiarities and curiosities? Any that you would add?
A hug and thanks for reading!