What Are Currency Pairs?
All trading within the foreign exchange(FX) market, whether selling, buying, or trading, is completed in currency pairs. Both national currencies haveindependent exchange rates. In a currency pair, one currency is the base currency and the other is the quote currency.
Key Takeaways
- All trading within the forex market occurs in currency pairs.
- Exchange rates continuously fluctuate based on the respective changing values of the currency in the pair.
- In a currency pair, one currency is the base currency and the other is the quote currency.
Exchange Rates
The exchange rates of foreign currency pairs float. This floatingrate means that the exchange ratecontinuallychanges. The currency pairs set the value of one vs. another, and the exchange rates continuously fluctuate based on the respective changing values.
The exchange rate between foreign currency pairs depends on thebase currency. A typical currency pair listing may be EUR/USD 1.3045. The euro (EUR) is the base currency, and the U.S. dollar (USD) is the quote currency. Here, €1 equals $1.3045.
The base currency, equal to one unit, is multiplied to yield an equivalent value or purchasing power of the foreign currency. The changes in currency exchange rates are known as the percentage-in-pointmovement (PIP).
Commonly Traded Pairs
Some currenciespair more frequently than other money and most contain the USD. The most commonly traded pairs include.
- EUR/USD (euro/US dollar)
- USD/JPY (US dollar/Japanese yen)
- GBP/USD (British pound/US dollar)
- AUD/USD (Australian dollar/US dollar)
- USD/CAD (US dollar/Canadian dollar)
- USD/CNY (US dollar/Chinese renminbi)
- USD/CHF (US dollar/Swiss franc)
- USD/HKD (US dollar/Hong Kong dollar)
- EUR/GBP (euro/British pound sterling)
- USD/KRW (US dollar/South Korean won)
What Is a Cross-Currency Pair?
A cross-currency pair does not include or use the U.S. dollar as a settlement currency. Common cross-currency pairs involve the euro and the Japanese yen.
What Is the Forex Market?
The forex market allows individuals, banks, and funds to buy, sell, or exchange currencies for hedging and speculative purposes. It is an over-the-counter (OTC) market that operates 24 hours a day, five days a week.
How Can Traders Profit in Currency Pairs?
Suppose a pair is listed as EUR/USD 1.55. A currency trader may establish a position where they aresimultaneouslylong the euro andshort the dollar. For traders to make a profit, the euro exchange rate must increase. Alternatively, when a forex trader shorts the EUR/USD currency pair, they speculate that the value of the U.S. dollar will rise above the euro.
The Bottom Line
A currency pair includes a base currency and a quote currency. All currency trading on the foreign exchange market occurs in pairs. The exchange rates fluctuate based on the changing values of each currency.
FAQs
In a pair, one currency is bought, known as base currency, in exchange of the other i.e. quote currency. The currency pairs are traded in the forex market. The first of the two is known as base currency, and the second is called quote currency.
What are currency pairs and how do they work? ›
What Are Currency Pairs? All trading within the foreign exchange (FX) market, whether selling, buying, or trading, is completed in currency pairs. Both national currencies have independent exchange rates. In a currency pair, one currency is the base currency and the other is the quote currency.
What are the 7 major currency pairs? ›
List of major currency pairs
| Currencies in the pair | Nickname |
|---|
| EUR/USD | Euro and US dollar | Fiber |
| USD/JPY | US dollar and Japanese yen | Gopher |
| GBP/USD | British pound and US dollar | Cable |
| USD/CHF | US dollar and Swiss franc | Swissie |
6 more rowsThe price of a currency pair is how much one unit of the base currency is worth in the quote currency. For example, for the currency “EUR/USD”, EUR is the base currency and USD is the quote currency. If EUR/USD is trading at 1.0950, then one euro is worth 1.0950 U.S. dollars.
What to look for when trading currency pairs? ›
The best Forex pairs often depend on market volatility, economic events, liquidity, and your personal risk tolerance. It's important to consider factors like the pair's average daily range, trading times, and costs.
How does currency work? ›
Summary. Currency value is determined by aggregate supply and demand. Supply and demand are influenced by a number of factors, including interest rates, inflation, capital flow, and money supply. The most common method to value currency is through exchange rates.
What is the safest currency in the world? ›
What is the safest currency in the world? The Swiss franc (CHF) is generally considered to be the safest currency in the world and many investors consider it to be a safe-haven asset. This is due to the neutrality of the Swiss nation, along with its strong monetary policies and low debt levels.
What's the best currency pairs to trade? ›
What are the most traded forex pairs in the world?
- EUR/USD (euro/US dollar)
- USD/JPY (US dollar/Japanese yen)
- GBP/USD (British pound/US dollar)
- AUD/USD (Australian dollar/US dollar)
- USD/CAD (US dollar/Canadian dollar)
- USD/CNY (US dollar/Chinese renminbi)
- USD/CHF (US dollar/Swiss franc)
What Is the Weakest Currency in the World? The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.
What is the best time to trade currencies? ›
Trade Tuesday through Thursday: Focus on trading during these days for more active and stable market conditions. Trade the forex London session time: Prioritize the London trading hours (3:00 AM – 12:00 PM EST) for its high liquidity and volatility, especially during its overlap with the US session.
When you buy a currency pair from a forex broker, you buy the base currency and sell the quote currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. Currency pairs are quoted based on their bid (buy) and ask prices (sell).
Is gold a forex pair? ›
Gold (XAU) is traded against the US dollar (USD), and its price represents the cost of one ounce of gold in USD. XAU/USD is traded on the forex marketplace like any traditional currency pair.
What is the most active trading session? ›
The U.S./London markets overlap (8 a.m. to noon EST) has the heaviest volume of trading and is best for trading opportunities. The Sydney/Tokyo markets overlap (2 a.m. to 4 a.m.) is not as volatile as the U.S./London overlap, but it still offers opportunities.
How do you predict currency pairs? ›
Purchasing power parity looks at the prices of goods in different countries and is one of the more widely used methods for forecasting exchange rates due to its indoctrination in textbooks. The relative economic strength approach compares levels of economic growth across countries to forecast exchange rates.
How to analyze a currency pair? ›
How do you analyze currency pairs and markets?
- Step 1: Choose your currency pair and time frame. Be the first to add your personal experience.
- Step 2: Apply your chart type and indicators. ...
- Step 3: Identify the trend and market structure. ...
- Step 4: Look for trading signals and setups. ...
- Here's what else to consider.
A currency pair is a price quote of the exchange rate for two different currencies traded in FX markets. When an order is placed for a currency pair, the first listed currency or base currency is bought while the second listed currency in a currency pair or quote currency is sold.
Why should I trade currency pairs? ›
Currency Crosses Provide More Trading Opportunities
By trading currency crosses, you give yourself more options for trading opportunities because these currencies are not bound to the U.S. dollar, thus possibly having different price movement behaviors.
Are currency pairs manipulated? ›
Their ability to decide what currency pairings to distribute and what bid-ask prices to set allows them to heavily influence specific sectors and tip the scales in their favour. So, while many regulations are set to prevent it, market makers manipulate forex through various means to increase their profitability.
