Have you ever wondered how a trader gets paid from the rise and fall of global currencies? The answer is simple: through the currency pair. The currency pair is the unit of exchange in the Forex Market, wherein every trade happens between currencies with one reflecting their value against the other. Understanding what is a currency pair is the first and most important thing to know as the aspiring global investor or novice Forex trader.
In this guide, we will clarify what is a currency part, how it works, the different types, and how to read and trade them like a professional.
What Is a Currency Pair in Forex?
Unlike a share market, where you could trade a single asset, a forex trade always consists of 2 currencies, the reason being when you buy one currency, you also sell a currency pair. Having both pairs allows you to speculate on how one currency economy works compared to another.
Categories of Currency Pairs in Forex
In the Forex market, currency pairs do not all exhibit the same behaviors. Some currency pairs are more widely traded, and have tighter spreads or more liquidity, while other pairs may have less trading volume, but have larger price swings.
To assist traders in navigating the different pairs with different behaviors, there are 3 currency pairs by category.
Major Currency Pair
Major pairs are the most actively traded currency pairs in the world and always have the U.S. Dollar (USD) present, the world’s reserve currency. The major pairs represent the largest and most stable economies in the world, and therefore provide:
- High liquidity (meaning that the trader can buy or sell the pair at any time without losing their entry price due to delayed hands on receipts)
- Lower spreads (the cost of each trade is smaller)
- Lower volatility (the price will fluctuate less compared to the exotic categories)
Because of these benefits, major currency pairs are the best pairs for starting traders as well as professionals.
- EUR/USD (Euro / U.S. Dollar)
- GBP/USD (British Pound / U.S. Dollar)
- USD/JPY (U.S. Dollar / Japanese Yen)
- USD/CHF (U.S. Dollar / Swiss Franc)
- USD/CAD (U.S. Dollar / Canadian Dollar)
- AUD/USD (Australian Dollar / U.S. Dollar)
- NZD/USD (New Zealand Dollar / U.S. Dollar)
Minor Currency Pairs
Second currency pairs are minor currency pairs, otherwise referred to as cross currency pairs, which include combinations of major world currencies without USD. Key Characteristics of Minor Currency Pairs:
- Moderate liquidity:
While not as heavily traded as major pairs, they nonetheless have decent trading volume. - Slightly wider spreads:
Because of less trading activity when compared to the majors, the cost of a transaction might be slightly higher. - Regional influences:
European, UK, Japanese, or Australian economic data normally moves these pairs strongly. - Great for diversification:
It is perfect for traders who want to take advantage of the movement in global currencies without directly taking exposure to USD.
- EUR/GBP (Euro / British Pound)
- EUR/JPY (Euro / Japanese Yen)
- GBP/JPY (British Pound / Japanese Yen)
- AUD/JPY (Australian Dollar / Japanese Yen)
- EUR/AUD (Euro / Australian Dollar)
- CHF/JPY (Swiss Franc / Japanese Yen)
Exotic Currency Pairs
Exotic pairs represent a unique and often exciting part of the Forex market. They involve a major currency pairing-like the USD, EUR, or GBP-appended to the currency of either a developing or smaller economy.
Because these currencies are from emerging or less liquid financial markets, they will also be more volatile, with wider spreads and less predictable movements than major or minor pairs.
Exotic pairs are traded less, and hence there are fewer buyers and sellers in the market. This can result in much larger gaps in prices and slower execution of trades, especially during periods of high volatility.
Being less liquid, exotic pairs normally have a wider spread-the difference between the price of buying and selling-compared to major or minor pairs. This is a cost that traders need to take into consideration when planning their positions.
- USD/TRY (U.S. Dollar / Turkish Lira)
- USD/ZAR (U.S. Dollar / South African Rand)
- USD/MXN (U.S. Dollar / Mexican Peso)
- USD/THB (U.S. Dollar / Thai Baht)
- EUR/SEK (Euro / Swedish Krona)
- USD/SGD (U.S. Dollar / Singapore Dollar)
How Do Currency Pairs Work?
The core mechanism of Forex trading is made up of currency pairs. Every transaction in the Forex market involves 2 currencies, one being bought and another sold simultaneously. This is because currencies are valued always relative to each other.
How to Trade Forex Starting with One Pair?
How to make money in Forex and trade with currency pairs? First, choose a pair. Beginners may want pairs with relatively smooth price movements to reduce unexpected losses. By observing how your selected pair responds to economical events, you can predict the price movements with greater surety.
Begin with a Demo Account and understand spreads, leverage, and trade execution. Even while focusing on one pair, one should not forget about risk management:
- Set stop-loss:
This automatically closes your trade if it goes against you beyond a certain point. - Set a take-profit:
automatically closes your trade once it has reached your target profit amount. - Limit position size, never risk more than a small percentage of your account on a single trade
Exotic pairs provide more opportunities but come with higher risk. Starting with one pair builds a good foundation and doesn’t overwhelm beginning traders with too many markets.
How to Understand a Forex Currency Pair Quote?
Every Forex quote is displayed as 2 prices: the bid, and the ask:
- Bid Price: The price you can sell the base currency.
- Ask Price: The price you can buy the base currency.
The difference between the 2 is referred to as the spread, which is the cost of the brokering trade. Example:
If EUR/USD = 1.1000 / 1.1002, your spread is two pips.
How the Value of a Currency Pair Changes?
Continually changing the value of a currency pair is a reflection of currency influence from the economic landscape of the real world. Presently, in the Forex market, the value indicates how much one currency is worth when compared to another currency and since the global economic landscape is steadily changing, exchange rates are constantly adapting, even from second to second.
At the heart of this fluctuation of the value of a currency pair is the relationship between the supply and demand for each currency in the exchange pair. When one currency is more desirable than the other, it gains value and the currency pair exchange rate adapts as needed. The pair falls in value when the base currency weakens.
Why Understanding What Is a Currency Pair Matters?
Understanding how currency pairs work helps traders to:
- Predict market direction more accurately
- Choose better entry and exit points
- Manage risk effectively
- Analyze global economies
- Identify profit opportunities
In other words, being aware of the connection between the 2 different currencies in a pair enables traders to make conscious and strategic decisions-one of the secrets of success for any Forex trader. With the help of a broker, you can therefore experience this process transparently through real-time pricing, advanced trading platforms, and reliable market analysis tools put in place to enable one to understand and hence trade currency pairs with confidence.
Factors That Move Currency Pairs
The following are some of the most important influences that drive currency pair fluctuations.
Interest Rate Decisions
Indeed, interest rates are among the most powerful drivers of currency values. When a country’s central bank raises interest rates, that country attracts more foreign investment because investors seek higher returns. It strengthens that currency.
Conversely, a bank cutting interest rates has the effect of weakening the currency, as investors transfer funds into higher yielding countries.
Economic Conditions
Economic reports paint a picture of a country’s financial condition, and traders do follow most of them. For example, retail sales and consumer confidence are the most important aspects of these conditions.
Political Events
Political stability and global events such as elections, conflicts, and national, international and global policy changes create uncertainty for a currency’s confidence. A trader will most often will re-locate their funds to a “safe-haven” currency such as the Japanese Yen (JPY) or Swiss Franc (CHF) when this happens.
For example: If an investor feels that the Eurozone economy gets “better” or “stronger” during a time when the U.S. economy is becoming “slower” or “weaker”, the demand for the Euro (EUR) in the event will rise relative to the U.S. Dollar (USD) and the EUR/USD exchange pair will begin to move “higher”, or increase in value.
The Euro is said to be “stronger”, meaning based on the value it has become more expensive in the U.S. Dollars. With real-time market data and rapid execution platforms, traders can promptly respond to such events.
Market Sentiment
Even with all the data available, much of Forex trading is influenced by how traders feel about the market, their confidence, fear, or optimism. This collective psychology is called market sentiment.
This is because when traders are optimistic about the world’s growth, they invest in riskier assets and currencies, such as the AUD or NZD. In times of uncertainty or crisis, they move to safe-haven currencies like the USD, JPY, or CHF.
The monitoring of several sentiment indicators-risk appetite, volatility indices, and news trends-all gives the trader a glimpse into what can happen next.
Central Bank Actions
Central banks represent the most influential actors in the Forex market. Central banks’ policies and forthcoming meetings are very significant for regular, long-run forecasts of currency trends, and there are some Forex brokers to assist with all-inclusive fundamental analysis capabilities.
Commodity Prices
Traders usually readjust their currency pair positioning whenever there is a change in the commodities market. It follows that this close relationship also means monitoring commodity prices helps traders anticipate currency pair movements before they actually provide a key advantage to those who follow the global market trends.
How do traders make profits in currency pairs?
Every Forex trader is trying to derive profit from the variable value of currency pairs. Since the exchange rate always moves up and down, traders can make money by predicting which currency will rise or fall in respect to another and opening trades in that direction.
Unlike other financial markets, Forex provides great opportunities to profit in both rising and falling markets. That is why Forex is considered one of the most flexible and active trading environments all over the world.
Buying (Going Long)
When traders expect that the base currency of a pair will increase in value compared to the quote currency, the position they open is a buy position, or going long.
Selling (Going Short)
Conversely, if traders expect the base currency to decline in value, they open a sell position, or go short. This is what makes Forex trading so dynamic: the ability to profit from both directions, whether the market rises or falls.
Benefit from volatility
For instance, major announcements of U.S. Non-Farm Payrolls (NFP) or central bank rate decisions often produce sharp movements, allowing traders to quickly get in and out for potential profits.
Long-Term Trading and Carry Trades
Not all traders focus on short-term movements, some also concern themselves with longer-term strategies-the carry trade being one, in which a currency that has a high interest rate is purchased and one that has a low interest rate is sold.
This enables them to gain not only from the price movement but also from the difference in the interest rates of the 2 currencies. Carry trade works best under conditions of stable markets and well-defined interest rate trends.
Using Technical and Fundamental Analysis
Moreover, successful traders do this with a mix of technical analysis, entailing price charts, patterns, and indicators, and fundamental analysis, entailing economic data, central bank policies, and political events. Technical traders seek to find entrance and exit Forex signals through price action and chart trends.
Risk Management
Success in Forex does not only depend on making good predictions but also on how well the traders protect their capital. Smart traders use tools like Stop-loss orders to automatically close losing trades.
Traders make profits with currency pairs when they predict correctly that one currency is about to go high or low against another and put on a trade accordingly.
Tips for Beginners: How to Choose the Right Currency Pair
If you are a beginner in Forex, start with pairs which have low spreads and stable trends:
- EUR/USD
- GBP/USD
- USD/JPY
These are highly liquid pairs, meaning they trend predictively and seldom experience wild swings in price. With time and growing experience, you may choose to venture into minor or exotics for diversification and higher potential returns.
Currency Pairs Trading Through STP Trading
At STP Trading, we enable traders to access the global Forex market in a way that is fast, transparent and secure. Here are several reasons thousands of traders choose to trade with STP:
- No dealing desk, your trades are sent straight to the liquidity providers.
- Ultra-fast execution, perfect for scalpers and long-term traders, alike.
- Competitive spreads, save more on each trade.
- Professional trading platforms, access to MetaTrader 5 with familiar platforms.
- Islamic (Swap-Free) accounts, trade fairly and without interest.
- Full service support, multilingual support 24/5 like free signal and real time analysis
With STP, you can trade all major, minor and exotic currency pairs with confidence and institutional-level liquidity and technology.
Conclusion: Begin Your Currency Pairs Trading with Confidence
Understanding what is a currency pair forms the very foundation of any Forex trader’s road to success. Whether it is to analyze world markets, hedge against risks, or build a profitable strategy, everything begins with mastering how one currency interacts with another.
By choosing the right broker, you don’t just get access to the market, but also a partner who’s committed to transparency, speed, and the success of the trader. Open your account on STP Trading and start trading the world’s top currency pairs with confidence and clarity. It is the best time to take your first step toward smarter Forex trading.
