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Roughly estimated at over ten million globally, the population of forex traders continues to grow, with currency pair trading gaining traction in India as well. The simplicity of currency markets, coupled with intuitive price changes, attracts traders, aided by minimal fees and commissions owing to substantial trading volumes. Nonetheless, comprehending fundamental terminologies within forex trading is crucial before diving into the markets. ‘Currency pair’ stands as one such term, and this article aims to unravel its significance in forex trading.
Table of Contents
Understanding Currency Pair
A financial instrument that can be purchased and sold on a currency exchange is a currency pair. Each pair consists of two different currencies.
The foreign exchange market frequently involves trading currency pairings. For international trade and investment, the forex market allows the buying, selling, and conversion of currencies. In general, the currency market is accessible 24 hours and five days a week. Currency is constantly bought and sold in forex trading.
In forex trading, the Indian Rupee (INR) can be part of various currency pairs.
- For instance, the USD/INR pair involves the Indian Rupee and the United States Dollar. This pairing denotes the value of one US Dollar in terms of Indian Rupees. If the USD/INR pair is trading at 75.00, it means one US Dollar is equivalent to 75 Indian Rupees.
- Another example could be the EUR/INR pair, which represents the value of one Euro in terms of Indian Rupees. If the EUR/INR pair is trading at 90.00, it signifies that one Euro is equivalent to 90 Indian Rupees in the forex market.
Traders analyse these currency pairs to speculate on the potential fluctuations in the exchange rates between the currencies involved, aiming to profit from these movements by buying or selling the pairs based on their market predictions.
Base and Quote Currency
The base currency is regarded as the first currency in the currency pair quotation, and the quoted currency is regarded as the currency in the second part of the quotation.
- Frequently, currency pairs are shown as 6 letters and a dash, such as AAA/BBB. In this instance, the base currency is AAA, while the quote currency is BBB. Although some of these codes seem clear, you may also encounter less well-known ones. HUF (Hungarian Forint) is one such currency pair.
- Investors buy the base currency and sell the quoted currency when buying a currency pair.
- The bid price denotes how many units of the base currency must be exchanged for one quote unit. In other words, the bid price is what a forex broker pays when he purchases base currency from a trader in return for quote currency.
- Conversely, when the currency pair is sold, the investor obtains the quote currency and sells the base currency. This is called the ask price.
- The amount one will be paid in the quote currency in exchange for giving up one unit of the base currency is the selling price of the currency pair. For example, if the USD/INR exchange rate is 75, you will get 75 Indian Rupees in exchange for one US Dollar.
The Most Traded Currency Pairs
Statistics say the daily value of currency trades stands at over $6 trillion. The EURUSD currency pair often accounts for about a quarter of the market. So, it’s clear that the Euro and Dollar are the most traded currency pairs. The trading volume of two currency pairings often represent the size of two economies. This is why EUR and USD dominate the market. Participants in the ‘real’ economy exchange currencies for their business activities. They conduct the majority of the daily trading activity in currencies.
Types of Currency Pairs
Based on trading activity, liquidity, and volume across the globe, forex currency pairings are categorised into three primary categories.
- Major currency pairs
- Minor currencies
- Exotic currency pair
The primary factor used to categorise forex currency pairs is the size of the market. However, novice traders should be aware that this classification system is informal. Each currency has unique characteristics. Currency pairings are categorised in a way that investors can understand the diverse market circumstances.
Major Forex Pairs
Tickers of major currency pairings are:
- EURUSD: Euro to US Dollar
- USDJPY: US Dollar to Japanese Yen·
- GBPUSD: British Pound to US Dollar
- USDCHF: US Dollar to Swiss Franc
These currency pairs are ranked in this order both for historical and current trading volume reasons in each market. For instance, many people purchase Swiss Francs as safe-haven investments. All of the major forex currency pairs include USD. This is not surprising as the US economy is the largest in the world. Seven pairs are considered to be the major forex pairings. They are as follows.
| Ticker | Currencies | Nickname |
| GBP/USD | British Pound/US Dollar | Cable |
| USD/JPY | US Dollar/Japanese Yen | Yen |
| EUR/USD | Euro/US Dollar | Euro |
| USD/CAD | US Dollar/Canadian Dollar | Loonie |
| AUD/USD | Australian Dollar/US Dollar | Aussie |
| NZD/USD | New Zealand Dollar/US Dollar | Kiwi |
| USD/CHF | US Dollar/ Swiss Franc | Swissy |
Minor Forex Pairs
Minor currency pairs always contain at least one of the major international currencies. This comprises the British Pound, the Japanese Yen, and the Euro. It does not include the US Dollar. There are more minor currency pairs than the major ones. Moreover, more combinations can be made with minor currencies. The most widely used minor forex pairs are shown below.
| Ticker | Currencies | Nickname |
| EURGBP | Euro/British Pound | Chunnel |
| GBPJPY | British Pound/Japanese Yen | Guppy |
| EURJPY | Euro/Japanese Yen | Yappy |
When it comes to the Indian Rupee (INR), while it is not among the major currencies in forex trading, trading volumes in INR currency pairs might not be as high as those involving major currencies, but they are significant for participants interested in transactions involving the Indian Rupee.
Exotic Currency Pairs
Exotic currency pairs involve the US Dollar on one side and an emerging market’s currency on the other. Examples of emerging or developing markets are Brazil, Mexico, South Africa, and Thailand. Trading exotic currency pairs may carry greater risk than trading the major or cross-currency pairs. This is because price fluctuations might be unreliable as a result of lower liquidity.
Exotic currency pairs are typically much more susceptible to political, economic, and social events due to the lower degree of liquidity. For instance, a national election or a local political scandal can result in swift and important changes.
Examples of exotic currency pairs include the following.
| Ticker | Currencies | Nickname |
| USD/ZAR | US Dollar/South African Rand | Greenback Rand |
| USD/THB | US Dollar/Thai Baht | Yankee Baht |
| USD/BRL | US Dollar/Brazilian Real | Greenback Real |
| USD/MXN | US Dollar/Mexican Peso | Yankee Peso |
Best Currency Pairs to Trade
The major forex currency pairs are the best to trade, especially for newcomers. Their fluctuations are more predictable when compared to cross-currency and exotic pairs. You don’t have to predict which side of the pair will have a bigger influence when trading the majors. Unlike with the exotics, you don’t suddenly discover that a revolution has already begun elsewhere. In such a case, your analysis will no longer be valid. When thinking about trading the three most popular currency pairings, keep the following considerations in mind:
- The risk is reduced because the EUR/USD has the tightest spread and is generally stable.
- Although the USD/GBP is a little bit more volatile than the EUR/USD, it also offers a bigger profit per pip.
- The USD/JPY is also a good one due to its low spreads and high liquidity.
- Trading large currency pairs is often less dangerous than trading other sorts of pairs. However, if you don’t have a proper strategy, you might still lose money just as easily.
- The secret to successfully trading any currency pair is to carefully analyse its movements and the factors that contribute to them.
- You can become familiar with the characteristics of each pair only by practice. The majority of successful traders advise newcomers to begin with one pair and concentrate on that pair until they are experts in it.
Conclusion
An understanding of currency pairs is vital for aspiring forex traders. Currency pairs are financial instruments bought and sold on a currency exchange. They are divided into three groups; major, minor, and exotic. Major pairs, such as EUR/USD and GBP/USD, offer stability, while the USD/JPY combines low spreads and liquidity. Success in currency trading depends on thorough analysis and practice. It is essential to remain watchful, adapting to economic and geopolitical events that can influence currency fluctuations. The forex market is an ever-evolving landscape. A strong grasp of currency pairs is the cornerstone for successful forex trading.