If you are interested in forex trading, you may have heard of currency pairs. You may even be familiar with common examples like EUR/USD and USD/JPY.
Despite their popularity, these instruments can be difficult to understand. And that’s especially true if you’re new to the investing world.
Luckily, we’re here to help. Read on for the straightforward guide on currency pairs that you’ve been looking for! We go over the basics, different types, how to trade, and more.
A currency pair is an asset that involves the simultaneous trade of two currencies. Even though it consists of two currencies, it acts as a single instrument with a defined value (much like a stock or bond acts as a single instrument). Investors can buy and sell these instruments at a profit or loss.
Realize that all currency pairs consist of a “base” and a “quote.” When we write out the quotation, the base is always on the left and the quote is always on the right.
To help you understand the concept, let’s use an example.
One of the most popular currency pairs is EUR/USD. Reading the quotation from left to right, we can determine that EUR is the base and USD is the quote.
Let’s say that the latest value of this asset is 1.25. This number tells us the exchange rate in terms of the quote. So, in this example, $1.25 would equal €1.00.
When you start trading with forex brokers, you’ll notice different types of currency pairs. Here are a few of the most common:
Major currency pairs (AKA The Majors) make up the majority of trading in the forex market. They are as follows:
The Majors represent the world’s major economies, as evident by the presence of USD in every pair. They have the highest trading volume, and while their prices tend to fluctuate, it’s rare to see a significant change over a short period.
While The Minors do not feature the USD, they feature at least one of the other major currencies (GBP, JPY, EUR, etc.). They tend to be more volatile and have a higher forex spread.
Exotic pairs feature two currencies — one major and one from an emerging economy. Examples include USD/PLN and USD/RUB.
Bookmark This Guide on Currency Pairs
This guide should give you a solid foundation on currency pairs. When you decide to buy via a forex broker, remember that these assets are just the combination of two currencies. Their value reveals how much of the quote equals one unit of the base.
Realize that, like with any type of investing, trading these assets comes with risk. By doing your research and remembering that no one can predict the markets, you’ll be able to make smart financial decisions.