What is traded on the Foreign Exchange?
Understanding currency pairs
Forex trading involves buying one currency and selling the other. The buying and selling of money in the foreign exchange market present countless opportunities for a trader to gain huge profits.
Every currency is traded in pairs. Pairs are always kept together because the currency pair’s rate is based on the valuation of those two specified currencies.
The ‘major’ currencies are the United States dollar (USD), the euro (EUR), the British pound sterling (GBP), the Japanese yen (JPY), the Swiss franc (CHF), and the Australian dollar (AUD). These are the most popular currencies traded within the market. These six major currencies amount to 90% of the forex trading market.
Most pairs tend to offset against the USD. The most common currency pair in the market is often the EUR/USD.
The rate at which a currency pair is traded is called the ‘exchange rate.’ This exchange rate is constantly changing in Forex, and is affected by the supply and demand of currencies.
A currency pair holds a ‘base currency’ and a ‘quote/counter currency.’ The first currency of the pair is the base currency, while the second is the quote/counter. For example, GBP/JPY … GBP=base and JPY= quote.
A trader either buys the base currency or sells it in exchange for the quoted currency.
A trader will determine with the exchange rate how much of the quoted currency they require to purchase one of the base currencies.
A ‘quote’ in Forex relates to the rate you buy or sell with your selected currency pair. Keep in mind that this is different from a ‘indication’ as this is where the market maker’s given price is merely informational.
A direct quote is a price for one US dollar referring to another currency, and an indirect quote is a price for one UNIT of another currency referring to the US dollar.
When trading, there are two prices for a currency pair. There is a buy price, which is referred to as the ‘BID’ price. There is there sell price, which is referred to as the ‘ASK’ price. With these two prices, a ‘spread’ is created. A ‘spread’ is the difference between the ‘bid’ and ‘ask’ price.
Major Currency Pairs
There are a total of seven currency pairs that are considered to be major pairs. These all include the US Dollar on one side and are the EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, and NZD/USD.
These pairs represent not only the world’s largest currencies and economies, but are also the market’s most traded currency pairs. That means they move more frequently, though perhaps not as sharply as other currency pairs, and there are usually plenty of opportunities to get involved in trading these pairs all day long at any time. Because of the higher volume traded by these currency pairs, costs like forex spread may be lower as well.
Minor Currency Pairs
Minor currency pairs are those that do not feature the US Dollar on one side of the pair, but that typically does feature one of the other major currencies such as EUR, GBP, or JPY on one side of the pair.
These currency pairs can also be known as crosses or cross currency pairs. While they are not as widely traded as the major pairs, the top brokers typically stilly carry a large selection of minor pairs that are still quite frequently traded throughout the day. Some examples of popular minor currencies include the EUR/GBP, AUD/JPY, and GBP/CAD.
These limited currency pairs may be slightly more volatile than the major currency pair, and the trading cost in terms of forex spread may undoubtedly be slightly higher. That said, they ‘re still a well-traded and popular choice for most forex traders.
Exotic Currency Pairs
The last group of currency pairs are known as exotic pairs. These pairs are typically made up of one primary currency paired with one currency from an emerging economy. Examples here may include USD/RUB, USD/PLN, USD/HKD, and many others.
This type of exotic currency pair will not always be available for trading, though a selection of them may be conducted by some brokers. In general, these pairs are traded quite a bit less than the major or minor pairs. In some cases the spread is considerably higher. These pairs can also be significantly more volatile than other types of currency pairs, so when trading, this is something to keep in mind too.
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