All trades done on the foreign exchange trading market are done in pairs. It is important that you understand the workings of all the available pairs. You should learn how trades are done, the best currency pairs to trade and the best times to do the trades.
What Are Foreign Exchange Currency Pairs?
As the name suggests, a currency pair is a coupling of two currencies into a trading pair. All currencies traded on the foreign exchange market will be put into a pair with another currency. The reason for this is that forex trading is the buying of one currency and the selling of another. The currency pair tells you which currency you are buying and selling.
All the currencies are given a shortened identifier. These shortened names are the ones used by the International Standards Organisation. This means that the forex currency pair will be displayed as GBP/USD for the Pound and US dollar pair.
Determination of Pairs
Many new forex traders wonder how a currency pair is created. All currencies can be placed in a pair, but where they are in the pairing actually affects what the trader is doing. The two currencies in the pair are divided into the base and the quote. The base currency is the one which appears first in the pair and the quote is the second currency. It is very important that this is kept in mind because this can affect your trading.
When you enter a trade, you should consider the costs of the currency pair. The base currency will always have a value of 1. It is the quote currency that will have a value that varies and this is dependent on the exchange rate between the two currencies.
When you trade you will be given an ask and a bid price. The ask price is what the broker is willing to buy the base currency for, while the bid price is what they will buy the quote currency for. The bid price is always lower than the ask price in a forex quote. The difference between the two prices is the spread and that is the broker’s earnings on your trade.
Currency Pair Demand
New traders are told that they should trade with major currency pairs. These major pairs are the ones that are most in demand. There are eight major currencies that fall into this category. However, all combinations of the eight major currencies are not considered major pairs. There are only a few currency combinations that are considered to be major pairs.
The highest demand is for currencies linked to countries that are politically and economically stable. The US dollar is one of these currencies and many of the major pairs have the US dollar in them. Other major pairs include the British Pound and the Euro. These pairs are also good for new traders because it is easy to get information on the economic and political state of the countries for market analysis.