What are Forex currency pairs?
In the Forex market, currencies are traded in pairs. In these pairs each currency has meaning in relation to the other, so always stick together.
The two currencies in a pair are traded against each other. The rate or price at which these currencies are traded is known as the exchange rate. The exchange rate is regularly affected by supply and demand for currencies that make up the pair.
The most common currencies in the Forex
The currencies that are traded more regularly in the Forex market are known as “major” pairs. Most currencies are traded against the U.S. dollar (USD). The USD is traded more than any other currency at present. The next 5 most traded currencies in the market after the U.S. dollar are:
- Euro (EUR)
- Yen (JPY)
- British Pound (GBP)
- Swiss Franc (CHF)
- Australian Dollar (AUD)
In total, these six currencies account for 90% market share. The most common and traded currency pair is the EUR/USD.
The exchange rate or price of a pair
The exchange rate of Forex currency pairs is always changing. The value of different currencies is determined by the forces of supply and demand in the market, by comparison with another currency. In a FX pair, the first currency is known as the base currency, while the other is called the quote currency or counter currency. You can find more information in this article.
When a trader buys a currency pair, what he is actually doing is buying the base currency and selling the quote currency. The exchange rate tells a buyer how much of the quote currency needs to buy one unit of the base currency. The order in a pair always mean the same thing, and is a common approach in the industry. For example, the EUR/USD is a pair in which the EUR is the base currency and the USD is the quote currency. Order within the pair, in the way the term is used, does not vary. Thus, the trader buys or sells the pair, depending on the direction of the transaction.
In the case of USD/JPY, the trader can buy JPY using USD or can sell JPY to buy USD. In the exchange rates offered by the trading platforms of brokers like EasyMarkets, we can see how each pair available for trading is ordered.
For example, suppose that for the EUR/USD the platform indicates a value of 1.3000, which means that you need 1.3000 USD to buy 1 EUR. This also means that if we sell 1 EUR we get 1.3000 USD. All transactions involve the purchase of one currency and the selling of another one at the same time. If during the next day the price of the EUR is going up against the USD and the exchange rate is now 1.3100, this means that for every EUR we bought, we are earning 1 USD cent. Conversely if we trade in the opposite direction, for every EUR that we sold at 1.3000, we are losing 1USD cent, because in the end we bought the euros again for 1.3100.
Buying and selling of currencies
Traders in the FX market buy and sell Forex currency pairs to make a profit. There are two prices for trading currencies: the purchase price, known as “Bid” and the sale price, also called “Ask“.
The difference between the Bid and Ask price is the spread. The spread represents the difference between what the market maker gives to buy from a trader and what the market maker takes to sell to a trader.
For example, suppose the Bid/Ask price for the EUR/USD is 1.3000/1.3002. The market maker pays 1.3000 when the trader buys but takes 1.3002 when the trader sells. This means that if traders buy and sell immediately without any variation in the exchange rate they lose money. This happens due to spread – traders pay more to buy the currency than they receive when they sell at that time.
In fact, the spread is the main source of revenue for the market maker. As in any other market or business, the trader is buying at one price and trying to sell at a higher price.
The price of Forex currency pairs is known as “quote“. There are two forms of quotes in the Forex market: direct quotes and indirect quotes. A direct quote is the price of a dollar in terms of another currency. An indirect quote is the price for one unit of another currency in U.S. dollar terms.
The quote is the price at which a transaction is made with a pair.