Forex Currency Pairs GuideCurrencies / Forex Trading Jan 18, 2016 - 07:46 AM GMT
Forex trading works due to the value of a currency being determined by its relative value in comparison to another, you in currency pairings for this exact reason. These pairs are made up of a base currency (the first one) and a quote currency (the second). For example, with the GBP/USD currency pair the GB Pound is the base and the US Dollar is the quote. The pair shows how much of the quote currency is needed to purchase one unit of the base currency.
Forex trading is basically the simultaneous purchasing of one currency and selling of another, although a currency pairing itself can be thought of as one unit that can be bought or sold. When purchasing a pair, you are buying the base and selling the quote. The ‘bid’ (buy price) represents how much of the quote currency is required for a single unit of the base currency. On the other hand, when selling a currency pair, you sell the base and receive the quote currency in return. The ‘ask’ (sell price) for the pair represents how much of the quote currency you will receive in return for selling a single unit of the base currency.
Traders will often refer to currencies by their nicknames. For example, GBP/USD is often referred to as ‘cable’. This term originates from the communication cable that runs between the countries from over one-hundred years ago. Other nicknames include ‘Kiwi’ the New Zealand Dollar, ‘Loonie’ the Canadian Dollar, ‘Swissy’ the Swiss Franc, ‘Aussie’ the Australian Dollar, ‘Nokkie’ the Norwegian Krone and ‘Stokkie’ for the Swedish Kroner.
Commonly traded pairs are typically split into two groups related to liquidity and popularity: the Majors and Minors, with Commodities being a small subgroup of very commonly traded pairs.
Majors and Commodities are the most liquid and therefore are the most widely traded currency pairs in the market. These pairings account for the vast majority of all trading within the forex market. This is due to the fact that these pairs have the largest volume of buyers and sellers, along with typically having the tightest spreads.
The commodity pairings are the three pairs that include currencies from countries that possess and deal in vast quantities of commodities. Commodities are raw materials or agricultural products that can be bought and sold. Common commodities include gold, oil, wood, gas, sugar, salt, tea, coffee etc.
The three main commodity pairings are USD/CAD, AUD/USD, NZD/USD. The value of these pairs have a close correlation to changes in the value of these countries commodities, this means that traders can look fluctuations in the commodities to take advantage of these pairs.
Major Currency Pairs
These are the most liquid currencies, making them the most frequently traded. These pairs account for around 85% of total trading volume, with the EUR/USD pair alone accounting for roughly 28% of total daily global volume. The spreads for major pairings are generally tighter in comparison to minor currency pairs. These are some examples of major currency pairs:
- Euro vs. US Dollar or ‘Euro Dollar’
- British Pound vs. US Dollar or ‘Cable’
- US Dollar vs Swiss Franc or ‘Dollar Swissy’
- US Dollar vs. Japanese Yen or ‘Dollar Yen’
- US Dollar vs. Canadian Dollar or ‘Loonie Dollar’
- Australian Dollar vs. US Dollar or ‘Aussie Dollar’
Minor Currency Pairs
These aren’t traded quiet as heavily as the majors, resulting in more fluctuation in value. Spreads for minor pairs are usually wider due to the medium sized liquidity in the market, these are some examples of minor currency pairs:
- Australian Dollar vs. New Zealand Dollar or 'Aussie Kiwi'
- Euro vs. Japanese Yen or ‘Euro Yen’
- Euro vs. Swedish Kroner or 'Euro Stokkie'
- Euro vs. Norwegian Krone or 'Euro Nokkie'
Various other forex pairs allow you to take advantage of macroeconomic events and political situations within specific international markets, such as the US Dollar/Mexican Peso and US Dollar/Chinese Yuan.
If you’d like to find out more about trading FX itself and investing with forex trading then visit ETX for more information.
By Boris Dzhingarov
© 2016 Copyright Boris Dzhingarov - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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