Currency Pairs

Forex stands for foreign currency exchange, so the basic trading instruments on this market are currency pairs. As a rule, currencies are denoted by three letters, the first two letters refer to the country of the currency’s origin and the third letter is the name of the currency. For example, USD is a symbol of the United States dollar. By the way, the US dollar (USD) along with the euro (EUR), the Japanese yen (JPY), the British pound (GBP), and the Swiss franc (CHF) are considered to be the most liquid currencies which means that their quotes change more frequently than others’. 

A price of one currency versus another is constantly changing (rising or falling). For example, if we say that the US dollar is decreasing, it is not clear, as the US dollar can rise versus the Australian dollar and fall against the euro. Currencies are always traded in pairs. As currencies are quoted one versus another, the names of the currencies can be divided with a slash (/) and are written in the following way: EUR/USD. 

Currency pairs correspond to the ratio of currency prices making up the pair. For example, the price of the EUR/USD pair shows how many dollars you can buy for 1 euro. The first currency in the pair is a base currency and the second one is the currency of quoting or quote currency. In the example with EUR/USD, a base currency is the euro. 

The pairs, containing the US dollar and one of the currencies of developed countries are the major currency pairs, or simply majors. Here they are:

Interestingly, about 75% of all market operations on Forex are held on the EUR/USD, GBP/USD, USD/CHF, and USD/JPY pairs. Due to such popularity, let us provide a bit more information about some of these pairs.

EUR/USD is perhaps the most widely-traded currency pair. It appeared on April 7, 1989 and its initial rate was 1.0445. According to statistics of 2007, 27% of all operations on Forex were executed with the euro-dollar currency pair. In general, EUR/USD movements are smooth, but during the day high activity can be noticed and used by the intraday and short-term traders for getting profits. Traders who actively work with the euro-dollar currency pair should keep an eye on economic developments in the US and Europe. 

GBP/USD is a very popular trading instrument in Europe, especially in the United Kingdom. It is the fourth in the top of the world's most traded pairs, as its daily turnover amounts to about 12% of the total currency market volume. The pair is very volatile and it is hard to predict its movements. The price fluctuations can be very abrupt and can vary within a range of 130 pips. Low liquidity in the pair can be seen only during the Asian session. The GBP/USD pair has a nickname - some time ago it was called “a cable” as in the 19th century the connection between London and New York stock exchanges was made with the help of transatlantic telegraph cable. This nickname has survived to the present days. 

Another popular currency pair is US dollar vs Japanese yen (USD/JPY). This pair is third on the list of most traded currency pairs after the EUR/USD and GBP/USD. It is traded most actively during sessions in Asia. Movements of this pair are usually smooth; the USD/JPY pair quickly reacts to the escalation of risk on financial markets. In fact, the Japanese yen is considered a safe-haven currency, so most investors flee to it during the periods of instability. 

There are also minor currency pairs, aka crosses. These pairs include the currencies of developed countries without the US Dollar. For example: EUR/CHF, EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY, and NZD/JPY.

The third class of currency pairs is the exotic pairs. An exotic pair usually comprises a currency of a developing country and a major currency. These pairs are highly volatile but lack liquidity, so they have a potential of high returns and equally high risks. Here are some of the exotic pairs: USD/HKD (US Dollar/Hong Kong Dollar), EUR/TRY (euro/Turkish lira), USD/NOK (US dollar/Norwegian krone).