CURRENCY PAIRS DECRYPTED
Do you know your gopher from your guppy? We help you get to grips with currency pairs
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What are currency pairs?
All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies.
These are called ‘currency pairs’. They include a ‘base currency’ and a ‘quote currency’. One of the most common currency pairs used on the forex market is EUR/USD (Euro/US Dollar). The most popular currency pairs are known as ‘major pairs’, of which EUR/USD is one. GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD make up the rest of the major pairs.
Note: Forex prices are often quoted to four decimal places because their spread differences are typically very small. However, there is no definitive rule when it comes to the number of decimal places used for forex quotes.
On the forex market, trades in currencies are often worth millions, so small bid-ask price differences (i.e. several pips) can soon add up to a significant profit. Of course, such large trading volumes mean a small spread can also equate to significant losses.
Always trade carefully and consider the risks involved.
EUR / USD
Trades & Key Terminology
A ‘position’ is the term used to describe a trade in progress. A long position means a trader has bought currency expecting the value to increase. Once the trader sells that currency back to the market (ideally for a higher price than he paid), his long position is said to be ‘closed’ and the trade is complete.
A short position refers to a trader who sells a currency expecting it to decrease and plans to buy it back at a lower value. A short position is ‘closed’ once the trader buys back the asset (ideally for less than he sold it for).
For example, if the currency pair EUR/USD was trading at 1.0916/1.0918, then an investor looking to open a long position on the euro would purchase 1 EUR for 1.0918 USD. The trader will then hold the euro in the hopes that it will appreciate, selling it back to the market at a profit 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.
What are the most traded currency pairs on the forex market?
Major pairs are the most commonly traded, and account for nearly 80% of trade volume on the forex market. These currency pairs typically have low volatility and high liquidity. They are associated with stable, well-managed economies, are less susceptible to manipulation and have smaller spreads than other pairs.
Major Pairs include (nickname):
- EUR/USD (fiber)
- USD/JPY (gopher)
- GBP/USD (cable)
- USD/CHF (swissie)
- AUD/USD (aussie)
- USD/CAD (loonie)
- NZD/USD (kiwi)
Cross Currency Pairs – Crosses – are pairs that do not include the USD. Historically, Crosses were converted first into USD and then into the desired currency; these days they are offered for direct exchange. The most commonly-traded are derived from Minor currency pairs (EUR/GBP, EUR/JPY, GBP/JPY); they are typically less liquid and more volatile than Major currency pairs.
Crosses include (nickname):
- EUR/GBP (chunnel)
- EUR/JPY (yuppy)
- GBP/JPY (guppy)
- NZD/JPY (kiwi yen)
- CAD/CHF (loonie swissy)
- AUD/JPY
Exotics are currencies from emerging or smaller economies, paired with a Major. Compared to Crosses and Majors, Exotics are much riskier to trade because they are less liquid, more volatile, and more susceptible to manipulation. They also contain wider spreads and are more sensitive to political and financial developments.
Exotics:
- USD/MXN
- GBP/NOK
- GBP/DKK
- CHF/NOK
- EUR/TRY
- USD/TRY
You’ve mastered currency pairs, now it’s time to put your knowledge to the test. Join FXTM today!
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