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Beginner’s Guide to Currency Pairs

TABLE OF CONTENTS

Beginner’s Guide to Currency Pairs

Beginner’s Guide to Currency Pairs

Vantage Updated Updated Thu, 2024 January 18 08:04

What are currency pairs?

A currency pair is a combination of two different currencies which are valued against each other. This enables investors and traders to compare the value of one nation’s currency to another.

Trading currencies via pairs therefore involves two sides automatically – a buyer and a seller. The most commonly traded currency pairs are called the “majors” as they are the most liquid pairs, and all involve the US dollar on one side of the trade. 

Currency pairs can be traded in the global foreign exchange market, which is the biggest financial market in the world. Its average daily turnover hit $7.5 trillion per day in April 2022, according to the BIS Triennial Central bank Survey, which dwarfs the nearest markets [1].  

As there is no central market exchange, it is a market that never sleeps and is open 24 hours a day, five days a week. This is unlike stock or commodity markets which close at the end of each business day.

How to read currency pairs

All currencies have a three-letter currency code. This normally consists of the first two letters representing the country and the third being the actual currency. For instance, USD is the US dollar, the euro is EUR and GBP is the Great British pound.

Let’s use EUR/USD as an example:

  • The first currency is known as the base currency which is the Euro (EUR)
  • The second currency in this pair (the USD) is known as the quote currency

A ‘position’ is the term used to describe a trade in progress. 

  • long position means a trader has bought one currency (the base) against selling another (the quote), expecting the first currency’s value to increase over the second. 
  • short position refers to a trader who sells a currency expecting it to decrease and plans to buy it back at a lower value.

How currency pairs work?

Each transaction involves the selling of one currency and the purchase of another. Currencies are traded in pairs with the aim of potential returns from the appreciation or depreciation of one currency over the other. 

Let’s say that you changed €1,000 into US dollars for a vacation and got $1,100. After the exchange rate changed from €1.10 to €1, instead of getting €1,000 back, you would receive €1,100. 

You have gained €100 from holding your money in dollars while the exchange rate changed – the euro has dropped in value, while the dollar has increased in that time.

This is essentially how you trade in the currency market. For example, if the currency pair EUR/USD was trading at:

Currency PairBASE (BID PRICE)QUOTE (ASK PRICE)
EUR/USD1.09161.0918

An investor looking to open a long position on the euro would purchase 1 EUR for 1.0918 USD. The first price is the bid price which is the price the buyer will pay for the currency. The ask price is the price they would be willing to sell it. 

The trader will then hold the euro in the hope that it will appreciate, selling it back to the market once the price has increased.

An investor going short on EUR would sell 1 EUR for 1.0916 USD. This trader expects the euro to depreciate and plans to buy it back at a lower rate if it does.

The difference between the bid price and ask price is called the spread. This is generally quoted in number of “pips” or the fourth decimal point out. In our example, the spread is two pips. 

Major currency pairs [2]

What are they?

The most traded pairs are called the majors and make up the vast majority of trade volumes in FX. All these pairs include the US dollar (USD) because the USD is the reserve currency of the world as it has the biggest economy with a stable political system.

Which are they? [2]

EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD 

Minor currency pairs [3]

What are they? 

These currency pairs do not include the US dollar and are sometimes referred to as currency crosses. They are typically slightly less liquid and have a wider spread than the majors. 

Which are they? 

Here are a few examples: EUR/GBP, GBP/JPY, EUR/AUD, GBP/CAD, EUR/CHF

Exotic currency pairs [4]

What are they? 

These currency pairs may include the US dollar and emerging market currencies. They are not as liquid and spreads are much wider than the majors. 

Which are they?

Here are a few examples: USD/SGD (Singapore dollar), USD/HKD (Hong Kong dollar), EUR/TRY (Turkish Lira), GBP/ZAR (South African Rand)

How to trade currency pairs

There are two main types of forex analysis traders use to predict market movements and trade currency pairs – fundamental analysis and technical analysis. They tend to use one or a combination of these to fit their personality and/or trading style. 

What is Fundamental Analysis?

Fundamental analysis is the study of everything that affects a country’s economic strength, from economic to political to social factors. They will affect supply and demand of goods and services, which in turn changes the value and price of assets.

Examples can include central bank policy, geopolitical events, environmental factors, or company earnings reports – basically, anything you can think of which gives you clues to the market’s future direction. 

What is Technical Analysis?

This is the study of price movement and trends on charts as these movements generally give clues about hidden levels of supply and demand.  

The aim of technical analysis is to identify recognisable historic patterns that will help traders find the right time and price point at which to enter and exit the market. 

It is not an exact science and is open to interpretation. As with any discipline, technical analysis takes time and dedication to become skillful at it! 

Final Thoughts

Currency pairs allow traders to enter and exit the world of foreign exchange trading. 

Vantage Markets provides you with advanced trading software for free. This enables you to access currency pairs and trade the “market that never sleeps”. Further education, webinars and trading tools are available to help you improve your knowledge and expertise. Get all the latest market news and analysis on the Vantage website to keep yourself updated.

Open a live account with Vantage and start your trading journey now!

References

  1. “OTC foreign exchange turnover in April 2022 – BIS” https://www.bis.org/statistics/rpfx22_fx.htm Accessed 30 June 2023
  2. “Major Pairs: Definition in Forex Trading and How to Trade – Investopedia” https://www.investopedia.com/terms/forex/m/majors.asp Accessed 30 June 2023
  3. “FOREX EXPLAINED – WHAT ARE MINOR FOREX PAIRS? – Forextraders.com” https://www.forextraders.com/what-are-minor-forex-pairs/ Accessed 30 June 2023
  4. “A crash course in major, minor and exotic currency pairs – Finder” https://www.finder.com/uk/major-minor-exotic-currency-pairs#exotic-currency-pairs Accessed 30 June 2023
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