Before you enjoy making a profit with fxcess, you need to understand first what currency pairs mean in forex trading. All the transactions in forex trading that touch on currency pairs are the buying and selling of two currencies. Currency pairs are the dyadic quotations of the relative value of currencies against the other unit of currencies in the foreign exchange market. Let’s say:
The forex trader offers combinations of currency pairs to trade. It includes the US Dollar against the Japanese Yen, Euro against the US Dollar, and British Pound against the US Dollar.
What is a currency pair?
A currency pair is made of two types of currencies:
- Base currency
- Quote currency
The price of a pair is the cost of the quote currency in buying one unit of the base currency.
Components of currency pair trading
There are four major components of currency trading:
- Base currency. The first currency appears in the forex pair and is quoted on the left. The currency is bought or sold as an exchange for the quote currency and worthing 1.
- Bid price. It is the value that a trader is prepared for in selling a currency. The bid price is provided in real-time and constantly updated in the live market.
- Quote currency. The quote currency is what the second currency is called. It is the value exchanged for 1 unit of the base currency.
- Ask price. It is the value that the trader accepts to buy a currency. It is the cost a seller is inclined to accept. Ask price is given in real-time and constantly changing.
Groups of currency pairs
Currency pairs come in three different groups:
- Major currency pairs. It is most traded and accounts for more than 80% of everyday forex trade volume. You will have the 4 traditional majors:
While you have the three popular commodity pairs:
These currency pairs have high liquidity and tend to have lower spreads.
- Cross-currency pairs. These are also known as crosses, excluding the US Dollar. Traditionally, these were converted first to USD as the desired currency. But, now offered for direct exchange. Most commonly traded are derived from minor currency pairs and less liquid than the major currency pairs.
- Exotic currency pairs. These are currencies from developing or emerging economies, which are paired with one major currency. When compared to majors and crosses, exotics are riskier to trade because they are less liquid and more volatile.
Understanding currency pairs will help you in engaging in the forex trading business.