Understanding Currency Pairs in Forex Trading

Foreign exchange trading, commonly known as forex trading, is undoubtedly one of the biggest and expanding financial markets globally. It could be explained as engaging in currencies with an aim of earning profits from the fluctuating price as existing in foreign exchange market. To be able to have a proper picture of how Forex trading works, one has to start with the currency pairs as these act as the base on which all the trading activities within this market are contained.

In its simplest form this can be defined as the exchange of one currency for another, and hence a currency pair refers to two currencies. The currencies before the slash are called the base currency and those after the slash are referred to as the quote or counter currency. The price of a currency pair states a price that tells you how many units of quote currency are available for every one unit of base currency to purchase.

For example the position of EUR/USD shows that Euro (EUR) is the base currency while the US dollar is the quoted currency. If this pair’s price is 1.20 this is a statement that one Euro equals 1.20 US dollars. For instance if a trader assumes the dollar will fall against the euro, he will undertake to buy the EUR/USD with the operation of selling the deal a little higher. On the other hand there are those who have an opinion that the Euro will depreciate and they will thus be in a position to sell the pair because they know that they will be expensive to buy.

Currency pairs are typically divided into three main categories: Grouped according to nomenclature, the fx trading involves major pairs trading, minor pairs trading, plus exotic pairs trading. Major/major crosses or pairs are the most liquid and popular, which are the pairs that cross the two majors. It is always present as the US dollar while other one may contain European, British, Japanese or any other counter currency like EUR/USD, GBP/USD, USD/JPY and so on. Such pairs normally include more contained spreads – the cost of executing the pair is much lower than otherwise.

On the basis of ranking, some of the cross rate pairs are also called minor currency pairs and these are those that relate to two currencies that are other than USD. Long/Short pairs include EUR/GBP or AUD/JPY for example. These pairs may not be as liquid as the majors; the spread maybe slightly bigger but they are also helpful for the trader to diversify ‘

This classification is focused on cross currencies within those with the most trade with those from emerging or smaller economies. Such comparisons include but are not limited to; USD/TRY (US dollar and Turkish lira), EUR/ZAR (Euro and South African rand). These pairs can be very volatile and less of their volume which can actually be traded in the market imply that the trader is taking more of his capital to risk. But those who are able to invest correctly, taking into account the risks provided by some spokes of exotic pairs, receive good opportunities.

The foreign exchange market often referred to as fx trading can be exciting and quite possibly financially rewarding if many aspects are understood including two fundamental aspects of trading along with the relation between two currencies in the global market. Price behavior of currency pairs as well as the method through which they are quoted gives the trader a better chance of providing correct risk and reward.