What Is a Currency Pair?
Foreign exchange essentially involves the buying and selling of currencies and commodities. However, currency trading is more common in the forex industry, and for any trader to be able to trade currencies, he must have a good knowledge of currency pairs.
So, what are they exactly?
Currency pairs are quotations of two diverse currencies; here, a currency’s value is quoted against another. The currency which appears first on the pair is referred to as the base currency, whereas the second is known as the quote/counter currency. These pairs make a value comparison between two currencies; therefore, it is the base currency versus the quote currency. It specifies the amount of quote currency required to buy a unit of the base currency. An ISO currency code is used in classifying currencies; so, Euro’s ISO code is EUR.
Currency Pair Anatomy
Before venturing into trading, it is imperative to know what currency pairs are as well as their movement pattern. As we mentioned earlier, every pair involves two currencies. The forex market permits the buying, selling, and speculation of currencies. Also, currencies can be converted for investments and international trades. Every trade in the market comprises a coinciding purchase of a particular currency as well as the sale of another; however, the pair is seen as one entity. For instance, while trading a currency pair, buying a base currency automatically means you are selling the quoted currency.
The bid price indicates the amount of the quote currency needed to buy a unit of the base currency. On the other hand, selling a currency pair means you are selling the base currency and buying the quote currency. Hence, the ask price is the amount you in the quote currency while selling a unit of the base currency.
Types of Currency Pairs
The forex market has two major types of currency pairs, and this section will throw more light on that; read below.
Major Currency Pairs
One of the most traded currency pairs is the Great Britain Pound against the US dollar, also known as GBP/USD. It happens to be among the most liquid currency pairs in the forex market because of the trade volume it generates. If the quotation of GBP/USD = 1.1000, it implies that one pound is exchanged for 1.1000 US dollars. This scenario shows that GBP is the base currency, whereas USD is the quote currency. Therefore, one pound can be exchanged for 1.10 US dollars. Other major currency pairs include EUR/USD, AUD/USD, USD/CHF, USD/CAD, and USD/JPY; they all have narrow spreads in the forex market.
Minor Currency Pairs
Did you notice anything in the major currency pairs? We are sure you did. All majors include the US dollar; therefore, any pair with an absence of USD is a minor pair. Minor pairs do not have much liquidity compared to the major pairs, and they have slightly wider spreads. Examples of minor currencies include GBP/JPY, EUR/JPY, EUR/GBP, GBP/CHF, etc.
Being knowledgeable about currency pairs is among the basic things every forex trader should know. So, put in enough effort to gain knowledge.