Foreign Exchange Currency Pairs
There are some terms in forex trading that can heighten your curiosity. Some terms like currency pair, bid, ask, forex broker, etc. Today’s post will educate you on currency pairs and the terms that go with them.
Let’s dive right in!
What are currency pairs?
Currency pairs are the basis of forex trading. It is sometimes referred to as “pair currency.” Trading of currency pairs is conducted on the forex exchange market to allow transactions, i.e., buying and selling, often referred to as the exchange of currency.
How do currency pairs work?
A currency pair is synonymous with transactions in the current world, and a transaction must be between two concurrent parties. Hence, a pair. Currency can be cited with another pair. The pair currency is the quotation of 2 different currencies traded in forex.
A currency pair can be visualized as a struggle for supremacy between 2 sisters, contention, for a dress (ever been in this situation?) Well, I have! This brings about pulling against each other, a test of strength. It could be said that the two sisters on either side of the piece of clothing represent each currency pair.
What is the basis for trading currency pairs?
Currency pair trading is based on:
- The bid is also known as the buy price
- Ask is also referred to as the selling price
What is a bid?
Bid is the price a forex broker buys base currency from a trader in exchange for a quote currency.
What is Ask?
Ask is the price a forex broker sells base currency in exchange for quote currency.
Who is a Forex Broker?
A forex broker is a financial services firm that gives forex traders the opportunity to trade foreign currencies.
When a transaction takes place, this means a person buys while the other person sells. In forex trading, you’re selling one currency and buying another at the same time. The value of a currency is determined by comparing one rate to another. Trading currency pairs deals with comparing values.
Types of currency pairs.
Pair simply means to group into a set of two. Hence, we have:
- Base currency, as well as
- Quote currency
For example, EUR/USD is a currency pair that denotes a base currency and a quote currency. This means buying the base currency and conversely selling the quote currency. The quote currency is also referred to as the counter currency. This helps to indicate the amount of a quote required to buy a base unit.
Currencies are identified by the International Organization for Standardization currency code (ISO). ISO is an alphabetic code of 3 letters. These 3 letters represent various currencies and they are used globally. They are made up of symbols and cross rates used in trading currencies. Most of the time, the first 2 letters denote the country’s code name and the third letter, the country’s currency.
USD-the US depicts’ the United States and the D, dollars, the US currency. The 3 letters have 3 digits that correspond to the numeric code that designs the base and the quote currency in forex trading.
With forex currency pairs, it makes exchange very easy. For example, if traveling from one country to another country, e.g., from Europe to the US, you’d have to trade the USD/EUR pair, thereby selling the EUR and simultaneously buying the USD. This helps to boost commerce when you get to your destination (USA).
The advantages of trading currency pairs
- Certainty: Trading currency pairs makes trade and investment less risky. This is because you are particular about the exchange result. It will help control devaluation and revaluation, where there is no presumption, since it is at a fixed exchange rate.
- Decision-making: Trading currency pairs helps you make decisions. This is because you have a blueprint for how things will turn out.
The 10 major currency pairs (the most traded currencies in the world.)
- USD-United States Dollar
- JPY-Japanese Yen
- GBP-Great Britain Pound Sterling
- AUD-Australian Dollar CAD-Canadian Dollar
- CHF-Swiss Franc
- HKD-Hong Kong Dollar
- NZD-New Zealand Dollar
Taking the EUR/USD as a case study:
If the euro appreciates against the dollar, i.e., 1 euro will be worth more than 1 dollar, this will cause the pair to rise. If the euro depreciates against the dollar, the pair price will fall.
Liquidity is used to describe the level of activity in a financial market. The more a currency pair is traded, the greater its liquidity. This depends on the volume being traded and the number of active traders buying and selling the currency pair. For example, traders trade more in EUR/USD compared to AUD/USD. This simply means the EUR/USD pair is more liquid compared to the AUD/USD pair.
The most heavily traded pair is referred to as the most liquid pair. This means that the EUR/USD pair is the most liquid pair, followed by the USD/JPY pair.
Most of the time, currencies with high volatility move more pips than currencies with low volatility. When currency pairs with high volatility are involved, it leads to an increase in trading risk.
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This article on currency pairs is a well-researched one, providing you with enlightenment on currency pairs, their advantages, and other associable terms.
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