Those of you who are interested in Forex trading should know that in practice we trade currencies.
Basically, Forex trading is buying one currency and selling another currency at the same time.
Any currency that can be traded is nothing but a currency paired with another currency.
What is a Currency Pair?
Currency pair is a quote (quotation) of two different currencies. The currency is written first (front) is called the base currency, and the second currency is called the quote currency.
Currency pairs compare the value of one currency against another; base currency (first currency) versus quote currency (second currency). It shows how much of the quote currency is needed to buy one unit of the base currency.
Trading currency pairs can be found in the foreign exchange market, which is also known as Forex. It is the largest and most liquid market in the financial world. This market allows us to buy, sell, trade, and speculate on currencies. The forex market is open 24 hours a day, five days a week (including many holidays).
In Forex trading we buy one currency and sell another currency simultaneously, but the currency pair itself is considered a unit (an instrument bought or sold). When you buy a currency pair, you are buying the base currency and selling the quote currency. Conversely, when you sell a currency pair, you sell the base currency and receive the quote currency.
Currency pairs are quoted based on the buy (bid) and sell (ask) prices. The purchase price is the price at which the broker will buy the base currency from you. Sell (ask) is the price of the base currency that the broker sells to you.
Major Currency Pair?
The currency paired with the US dollar (USD) is the most traded currency and is referred to as the major currency, namely:
- EUR/USD or Euro vs US dollar
- USD/JPY or US dollar vs Japanese yen
- GBP/USD or British pound vs US dollar
- USD/CHF or Swiss franc vs US dollar
- AUD/USD or Australian dollar vs US dollar
- USD/CAD or Canadian dollar vs US dollar
The most traded currency pair is EUR/USD, making it the most liquid currency pair. For example, the EUR/USD quote is 1.2500, that is, one euro is exchanged for 1.2500 US dollars. In this case, EUR is the base currency and USD is the quote currency. Meaning again, 1 euro can be exchanged for 1.25 US dollars.
Another way to look at it is, that it will cost you $125 to buy 100 euros.
Minor and Exotic Couple
Currency pairs that are not linked to the US dollar are referred to as minor. This pair has a slightly wider spread and is not as liquid as the major currency pairs, but remains fairly liquid. The most traded crosses of these are currency pairs, one of which is also a major currency. Some examples of such crosses include EUR/GBP, GBP/JPY, and EUR/CHF.
Exotic currency pairs include emerging market currencies. The pair is illiquid, and the spread is much wider. An example of an exotic currency pair is USD/SGD (US dollar/Singapore dollar).
How to Trade Forex?
In general, to start trading Forex you need to find out more about Forex aka learn to trade, choose a broker that suits your needs, open an account, make a deposit, learn how the trading platform works, and then you are ready to trade.