Many countries in the world have a unique currency. Japan, for instance, has the Japanese Yen. Some nations, however, share a currency to simplify trading with other countries (the Euro being one example).
When you want to buy or sell a particular currency, you need to trade them in pairs. Learning how to read currency pairs is one of the first skills traders should have before traders should have before entering and succeeding in the forex market.
Defining a Currency Pair
A currency pair is a price quote of two different currencies. The first currency that shows up on the pair quotation is the base currency, also known as the transaction currency. The second currency, called the quote currency, determines the value of the base currency.
Forex traders perform the trading of currency pairs in the foreign exchange market with the aid of a fair forex brokerage firm. This liquid market, which is open 24 hours a day, seven days a week, allows people to exchange, buy, sell and speculate currencies.
Reading a Currency Pair
Traders identify currencies with a three-letter alphabetic code called an ISO currency code. The pound sterling, for instance, has GBP as its ISO code.
Then, traders look at three values: buy price, ask price, and the bid-ask spread. The “ask price” is the level at which people can sell the base currency. On the other hand, the “buy price” is the level at which individuals can acquire the transaction currency. The “bid-ask spread” is the difference between the two prices.
The goal of forex traders is to buy low and sell high. This entails buying currency pairs at a low price and selling them when the price increases.
Measuring Changes in Currency Value
When the value of one currency changes, it adjusts relative to another currency. Take the GBP/USD currency pair as an example. If the quotation goes from $1.2305 today to $1.2309 the following day, it means that the pound sterling has appreciated relative to the U.S. dollar. This also implies that the U.S. dollar has depreciated relative to the pound sterling, as it will cost the trader more U.S. dollars to buy a single pound sterling.
Traders measure this change in value using a unit of measurement called pip. One pip equals 0.0001. Going back to the GBP/USD example, if the given currency pair was to go up from $1.2305 to 1.2309, the increase of $0.0004 represents four pips.
Sometimes, forex brokerage firms provide quotes of five decimal places. Traders refer to this extra place as a fractional pip, otherwise known as a pipette. If the GBP/USD currency pair increased from $1.23057 to $1.23058, the value moved a tenth of a tip or one pipette.
Looking at the Types of Currency Pairs
Currency pairs fall under the following three main categories:
Major Currency Pairs (Majors)
This pairing always involves the U.S. dollar and another major economy. The primary reason for the inclusion of the dollar is its unique position as the global reserve currency. This means that all countries, regardless of the currency they have, can trade with the U.S. dollar.
Majors are highly liquid and generally stable, making them attractive to foreign exchange traders. The price also changes more frequently, giving traders plenty of opportunities to profit. Forex beginners looking to make their first trade can start with major currency pairs.
A few examples of majors are:
Cross-Currency Pairs (Crosses)
A cross-currency pair is composed of pairings that do not involve the U.S. dollar. Although crosses aren’t as frequently traded as majors, they’re still sufficiently liquid and provide trading opportunities.
A few popular crosses are:
Exotic Currency Pairs (Exotics)
Exotics pair the US dollar with a country with an emerging economy, such as Thailand, Brazil and South Africa. Trading with exotic currency pairs is risky, as they are more sensitive to social, political and economic events. Examples of events that can cause immediate and drastic movements on currency prices are social unrest, political scandals and news of economic decline.
A few pairs that belong in the exotic category are:
- USD/THB (U.S. Dollar-Thailand Baht)
- USD/BRL (U.S. Dollar-Brazilian Real)
- USD/ZAR (U.S. Dollar-South African Rand)
Trade Currency Pairs with Fair Forex
If you’re going to trade currency pairs, you’ll need a high-quality broker that is friendly to both trading professionals and novice foreign traders. Fair Forex is a brokerage firm you can trust when you’re looking to trade currencies. Apart from our stellar customer support, we help traders achieve success in the foreign exchange market by offering them free access to signals, indicators, peer support and professional traders.
Contact us today for further details about our forex trading accounts.