Getting started in the forex market can feel complex, with new terms and concepts to learn. One of the most fundamental concepts to grasp is the currency pair. This guide answers the most common questions about currency pairs to give you a solid foundation for your trading journey.
What is a currency pair?
A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. For example, in the currency pair EUR/USD, the Euro (EUR) is the base currency and the US Dollar (USD) is the quote currency. The price of this pair indicates how many US dollars are needed to purchase one Euro.
How are currency pairs categorized?
Currency pairs are typically divided into three main categories:
Majors: These are the most traded pairs in the Forex market and always include the US dollar (USD). Examples include EUR/USD, GBP/USD, and USD/JPY. They are known for their high liquidity and low spreads.
Minors (or Crosses): These pairs do not include the US dollar but feature other major currencies like the Euro (EUR), Japanese Yen (JPY), or British Pound (GBP). Examples are EUR/GBP, EUR/JPY, and GBP/JPY.
Exotics: These pairs consist of one major currency paired with the currency of an emerging economy, such as Brazil (BRL), Mexico (MXN), or South Africa (ZAR). An example is USD/ZAR. Exotic pairs are usually less liquid and have wider spreads, making them riskier to trade.
How do you read a currency pair quote?
A currency quote always includes two prices: the bid and the ask.
The bid price is the price at which a trader can sell the base currency.
The ask price is the price at which a trader can buy the base currency.
For instance, if the EUR/USD quote is 1.0750/1.0752, it means you can sell one Euro for 1.0750 US dollars (the bid price) or buy one Euro for 1.0752 US dollars (the ask price). The small difference between these two prices is known as the spread, which is how brokers make their profit.
Why is understanding currency pairs important?
Understanding currency pairs is essential because they are the foundation of all Forex trading. Your success as a trader depends on your ability to analyze these pairs and predict their price movements. Each pair has unique characteristics influenced by economic factors like interest rates, inflation, and political stability in their respective countries. By learning how these pairs behave, you can develop effective trading strategies and make more informed decisions in the market.