Understanding Currency Pairs in Forex Trading
In forex trading, the two currencies that are traded form a currency pair, and there are many different pairs that forex day traders can trade. Traders can choose "larger pairs", "crosses" and "exotic", and there are pairs that are common as EUR/USD (US $) and much less common as USD/MXN (US Dollars and Mexican pesos).
However, to begin with, let's take a look at what a pair of currencies consists of. Currency pairs are made up of a base badge (the first one) and a counter currency (the second). In the currency pair EUR/USD, EUR is the base currencies and USD is the opposite currency. If the exchange rate of a pair is increasing, the base currency is increasing in value relative to the counter currency. When the exchange rate falls, the opposite happens.
Also, when you look at exchange rates, the rate is the amount of the counter currency needed to buy 1 from the base currency. For example, if GBP/USD has a price of 1.5000, it would take US $1.5 to buy 1 pound sterling.
The four main pairs include:
"Euro"-EUR/USD (euros and US dollars)
"Cable"-GBP/USD (Pounds sterling and US dollars)
"Gopher"-USD/JPY (US dollars and Japanese yen)
"Swisse"-USD/CHF (US dollar and swish francs)
Of these four, the "euro" tends to be the most popular commercial pair. The reason: The United States and the European Union are the two largest economies in the world, they are the most widespread currencies, and this pair is the most widely traded. However, the four have a massive volume and all are highly valued.
In general, many of the major currencies make similar movements in the markets. For example, EUR/USD and GBP/USD tend to move in a similar direction; If one is falling, the other will probably fall. That's not always true, but it happens quite often. Therefore, it is likely that a trader will not have a similar position in these currency pairs, as it would double its risk. However, USD/CHF has a negative correlation with GBP/USD and EUR/USD; This means that EUR/USD rises, USD/CHF falls and vice versa. They are not rules, but generalities. So they can't be applied in all circumstances.
In addition, several commodity currencies, including the Australian, New Zealand and Canadian dollar, can also be considered as important currency pairs. These pairs are AUD/USD, NZD/USD, and USD/CAD. Gold and silver are also raw materials and are matched with the US dollar: xag/USD and XAU/USD.
First, traders can avoid speculating about the USD movement. This strategy could be useful if the major economic news in the United States is expected to be like a work report or interest rate changes, which can create market volatility. Moreover, crossings tend to have stronger tendencies due to divergent expectations of interest rates and other economic factors. This allows for a more precise trade in trends. Common cross pairs include:
EUR/AUD
AUD/CAD
GBP/CAD
AUD/JPY
EUR/JPY
Finally, there are also "exotic" pairs to choose from. This is the currency of a developed country paired with that of an emerging country. It is much less common for traders to speculate on exotic couples for various reasons. First of all, these pairs are much more volatile so it is more difficult to predict the price movement. In addition, propagation tends to be much larger. With the main pairs, the extension can be as small as 2-5 pips; The spread of exotic couples, however, can be as big as 50 pips or more. This makes it a lot harder for a for-profit trader. Examples of exotic couples include USD/BRL (US Dollars and Brazilian reals) and USD/MXN (U.S. dollars and Mexican pesos).
In forex trading, the two currencies that are traded form a currency pair, and there are many different pairs that forex day traders can trade. Traders can choose "larger pairs", "crosses" and "exotic", and there are pairs that are common as EUR/USD (US $) and much less common as USD/MXN (US Dollars and Mexican pesos).
However, to begin with, let's take a look at what a pair of currencies consists of. Currency pairs are made up of a base badge (the first one) and a counter currency (the second). In the currency pair EUR/USD, EUR is the base currencies and USD is the opposite currency. If the exchange rate of a pair is increasing, the base currency is increasing in value relative to the counter currency. When the exchange rate falls, the opposite happens.
Also, when you look at exchange rates, the rate is the amount of the counter currency needed to buy 1 from the base currency. For example, if GBP/USD has a price of 1.5000, it would take US $1.5 to buy 1 pound sterling.
What are the main currency pairs?
It is widely assumed that there are four major currency pairs, although some say there are 6 or 7 "older". These four pairs drive most action on the forex market, and are the most strongly negotiated. This means that there are tons of volume of trade and liquidity in each of these pairs, and therefore, the behavior of these pairs is more predictable.The four main pairs include:
"Euro"-EUR/USD (euros and US dollars)
"Cable"-GBP/USD (Pounds sterling and US dollars)
"Gopher"-USD/JPY (US dollars and Japanese yen)
"Swisse"-USD/CHF (US dollar and swish francs)
Of these four, the "euro" tends to be the most popular commercial pair. The reason: The United States and the European Union are the two largest economies in the world, they are the most widespread currencies, and this pair is the most widely traded. However, the four have a massive volume and all are highly valued.
In general, many of the major currencies make similar movements in the markets. For example, EUR/USD and GBP/USD tend to move in a similar direction; If one is falling, the other will probably fall. That's not always true, but it happens quite often. Therefore, it is likely that a trader will not have a similar position in these currency pairs, as it would double its risk. However, USD/CHF has a negative correlation with GBP/USD and EUR/USD; This means that EUR/USD rises, USD/CHF falls and vice versa. They are not rules, but generalities. So they can't be applied in all circumstances.
In addition, several commodity currencies, including the Australian, New Zealand and Canadian dollar, can also be considered as important currency pairs. These pairs are AUD/USD, NZD/USD, and USD/CAD. Gold and silver are also raw materials and are matched with the US dollar: xag/USD and XAU/USD.
Crosses and Exotics: Other types of currency pairs
Traders may want to diversify their operations and move away from the most important currency pairs. Crosses and exotics offer that opportunity. Crossings are currency pairs in which neither the coin is the US dollar, and there are several benefits to trade crosses.First, traders can avoid speculating about the USD movement. This strategy could be useful if the major economic news in the United States is expected to be like a work report or interest rate changes, which can create market volatility. Moreover, crossings tend to have stronger tendencies due to divergent expectations of interest rates and other economic factors. This allows for a more precise trade in trends. Common cross pairs include:
EUR/AUD
AUD/CAD
GBP/CAD
AUD/JPY
EUR/JPY
Finally, there are also "exotic" pairs to choose from. This is the currency of a developed country paired with that of an emerging country. It is much less common for traders to speculate on exotic couples for various reasons. First of all, these pairs are much more volatile so it is more difficult to predict the price movement. In addition, propagation tends to be much larger. With the main pairs, the extension can be as small as 2-5 pips; The spread of exotic couples, however, can be as big as 50 pips or more. This makes it a lot harder for a for-profit trader. Examples of exotic couples include USD/BRL (US Dollars and Brazilian reals) and USD/MXN (U.S. dollars and Mexican pesos).
