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Forex Currency Pairs – Forex trading is the simultaneous act of buying one currency and selling another. Therefore, Forex exchange rates are always related to a currency pair.
For example, when you buy a set of clothes, you need to exchange a certain amount of money for it. Similarly, when you buy a certain “foreign currency,” you must exchange one type of money for another. The only difference here is that you are using money to buy money! In the foreign exchange market, currencies are always traded in pairs.
So, what is a currency pair? What are major currency pairs? And how many major currency pairs are being traded today? This article will help you better understand Forex currency pairs.
Let’s dive in!
1. WHAT IS A CURRENCY PAIR?
When trading Forex, you always buy and sell in specific currency pairs rather than individual currencies. Therefore, each pair represents two different currencies.
Additionally, there is a fundamental rule in Forex that you need to know:
- The first currency in the pair is called the base currency (the quoted currency).
- The second currency in the pair is called the counter currency (the quote currency).
- The base currency always has a unit of 1.
Example: The EUR/USD currency pair.
If EUR/USD = 1.123, it means 1 EUR = 1.123 USD.
2. WHAT ARE MAJOR CURRENCY PAIRS?
Major currency pairs are those that include the USD (either as the base currency or the counter currency). The other currency in the pair belongs to countries or regions with strong economies, such as Japan, Europe, the UK, Australia, etc.
In reality, there are seven most frequently traded currency pairs, meaning they have the highest liquidity. These include:
| Currency Pair | Countries | Market Name |
|---|---|---|
| EUR/USD | EU / USA | Euro Dollar |
| USD/JPY | USA / Japan | Dollar Yen |
| GBP/USD | UK / USA | Pound Dollar |
| USD/CHF | USA / Switzerland | Dollar Swissy |
| USD/CAD | USA / Canada | Dollar Loonie |
| AUD/USD | Australia / USA | Aussie Dollar |
| NZD/USD | New Zealand / USA | Kiwi Dollar |
2.1. The 7 Major Currency Pairs in Forex Trading
You can check out the list of the 7 major currency pairs in the image below:
Detailed Information About These Currency Pairs
EUR/USD
This is considered one of the most popular major currency pairs and is the most traded by Forex traders. It has a low spread (typically ranging from 0.7 to 1.2 pips). Moreover, its volatility is lower compared to currency pairs involving the British pound.
USD/JPY
This is a major currency pair favored by many traders due to its low spread fees and its potential for attractive profits for investors.
GBP/USD
This is one of the most volatile major currency pairs in the Forex market. However, it remains highly popular among investors because of its high profit potential.
If you are new to Forex trading, Finance Solutes advises against trading this pair initially. The reason is that it carries relatively high risk and has a large price fluctuation range. As a result, this pair can wipe out your account at any moment!
USD/CHF
Among Forex currency pairs, USD/CHF is widely followed by investors, whether they trade it or not. This is because it tends to move inversely to gold prices. Simply put, when gold prices rise, USD/CHF tends to fall, and vice versa—although this is not always the case.
In many cases, their prices may move in the same direction, but this does not happen frequently. Therefore, many traders analyze the USD/CHF pair as a basis for analyzing XAU/USD (gold trading).
AUD/USD
The reason USD/CAD is considered a major currency pair is due to Australia’s strong economy and its dynamic commodities trade. Moreover, Australia is one of the largest exporters of coal and iron ore. As a result, the price of the AUD has a significant impact on these commodities.
One key point to note is that AUD/USD tends to move inversely to pairs like USD/JPY and USD/CHF. Therefore, when making trading decisions, you can refer to the charts to make more accurate choices.
USD/CAD
Canada is one of the world’s largest producers of lumber, natural gas, and oil, especially crude oil. As a result, the Canadian dollar (CAD) is heavily influenced by oil price fluctuations.
NZD/USD
The last of the seven major currency pairs is NZD/USD. New Zealand is the world’s largest exporter of dairy products. This means that if milk prices rise, the NZD tends to appreciate accordingly.
2.2. Are Major Currency Pairs the Best Trading Pairs?
Not necessarily. While major currency pairs offer lower spreads and higher liquidity than other pairs, they can also be highly volatile. Therefore, major currency pairs can be a good choice for traders, but whether you make a profit depends entirely on your trading skills and strategy.
3. WHAT ARE CROSS CURRENCY PAIRS?
After World War II, the gold standard collapsed, and many currencies were valued against the USD. However, in the long run, this system made it difficult to exchange one currency for another without first converting it into US dollars.
For example, if you wanted to exchange GBP to JPY, you would first have to convert GBP to USD, and then from USD to JPY.
Due to the inconvenience of currency conversion, cross currency pairs emerged. These pairs do not require conversion through the USD but instead allow direct exchange between two currencies, making transactions faster and eliminating complex intermediary steps.
Below are some popular cross currency pairs for beginner traders:
3.1. Classification of Cross Currency Pairs in Forex
Cross currency pairs in the Forex market are categorized into three main groups as follows:
Group 1: Cross Currency Pairs with High Trading Volume
This group consists of currency pairs with high trading volume, including EUR, JPY, and GBP. Some notable cross currency pairs in this category are:
- GBP/JPY
- EUR/JPY
- EUR/GBP
- CHF/JPY
- …
Group 2: Cross Currency Pairs with Medium Trading Volume
This group includes less frequently traded cross pairs that do not contain EUR, JPY, or GBP, such as:
- AUD/CAD
- AUD/CHF
- AUD/NZD
- CAD/CHF
- NZD/CAD
- …
Group 3: Rare Cross Currency Pairs
These are currency pairs that many traders may not even recognize, including some emerging market currencies, such as:
- CHN/JPY (CHN: Chinese Yuan Renminbi)
- AUD/SEK (SEK: Swedish Krona)
- GBP/TRY (TRY: Turkish Lira)
- …
3.2. How to Calculate Cross Currency Pair Prices in Forex
For example, if you want to calculate the bid (sell) price or ask (buy) price of GBP/JPY, the first step is to check the bid (sell) and ask (buy) prices for both GBP/USD and USD/JPY.
Why these two pairs?
Because they both share the common currency USD, which acts as the intermediary.
With the following bid/ask price data:
- GBP/USD: 1.5635 / 1.5630 (bid/ask)
- USD/JPY: 89.43 / 89.38 (bid/ask)
To calculate the bid price of GBP/JPY, simply multiply the bid price of GBP/USD by the bid price of USD/JPY:
- Bid price of GBP/JPY = 1.5635 × 89.43 = 139.82
Similarly, to calculate the ask price of GBP/JPY, multiply the ask price of GBP/USD by the ask price of USD/JPY: Ask price of GBP/JPY = 1.5630 × 89.38 = 139.70
Thus, the final bid/ask price of GBP/JPY is 139.82 / 139.70.
3.3. Benefits of Trading Cross Currency Pairs
Here are some key benefits when traders choose to trade cross currency pairs:
No Need for Currency Conversion
One of the biggest advantages of cross currency pairs is that traders do not need to convert currencies into USD before trading.
Previously, traders had to first convert their local currency into USD and then exchange the USD for their desired currency. This process was not only inconvenient but also resulted in loss of value due to exchange rate fluctuations.
Profitable Trading Without Relying on USD Performance
Trading cross currency pairs allows traders to profit regardless of how the USD performs.
In fact, this strategy serves as an important indicator to measure the strength of other currencies relative to the USD, helping traders make better-informed trading decisions.
Expand Your Trading Opportunities
By choosing cross currency pairs, investors gain access to a wider range of trading opportunities. This approach helps eliminate the impact of USD fluctuations, which traders often experience when dealing with USD-based currency conversions.
The volatility of the U.S. dollar significantly influences the four major currencies: GBP, EUR, CHF, and JPY. These currencies tend to appreciate only when the USD weakens significantly.
4. SUMMARY
In conclusion, this article has covered:
✔ What are currency pairs?
✔ What are major currency pairs?
✔ What are cross currency pairs?
✔ Are major currency pairs always the best trading options?
Use your knowledge and market analysis to choose the best currency pair that suits your trading strategy. Wishing you success in Forex trading!
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