Forex trading works due to the value of a currency being determined by its relative value in comparison to another, you trade forex in currency pairs for this exact reason. The first currency of a pair is the base currency, and the second is called the quote currency. For example, with the GBP/USD currency pair the British Pound is the base and the US Dollar is the quote. The pair shows how much of the quote currency is needed to purchase one unit of the base currency.
FX trading involves the simultaneous purchasing of one currency and selling of another, however the currency pairing itself can be thought of as one unit that is either bought or sold. When purchasing a pair, you are buying the base and selling the quote. The ‘bid’ (buy price) represents how much of the quote currency is required for a single unit of the base currency. On the other hand, when selling a currency pair, you sell the base and receive the quote currency in return. The ‘ask’ (sell price) for the pair represents how much of the quote currency you will receive in return for selling a single unit of the base currency.
Traders will often refer to currencies by their nicknames. For example, GBP/USD is often referred to as ‘cable’. This term originates from the communication cable that runs between the countries from over one-hundred years ago. Other nicknames include ‘Loonie’ the Canadian Dollar, ‘Kiwi’ the New Zealand Dollar, ‘Swissy’ the Swiss Franc, ‘Aussie’ the Australian Dollar, ‘Nokkie’ the Norwegian Krone and ‘Stokkie’ for the Swedish Kroner.
Available Currency Pairs
Commonly traded pairs are typically split into two groups related to liquidity and popularity: the Majors and Minors, with Commodities being a small subgroup of very commonly traded pairs.
Majors and Commodities are the most liquid and therefore are the most widely traded currency pairs in the market. These pairings account for the vast majority of all trading within the forex market. This is due to the fact that these pairs have the largest volume of buyers and sellers, along with typically having the tightest spreads.
(See a full list of currency pairs with a symbol guide at the end of the article).
The commodity pairing are the three pairs that include currencies from countries that possess and deal in vast quantities of commodities. Commodities are raw materials or agricultural products that can be bought and sold. Common commodities include gold, oil, wood, natural gas, sugar, salt, tea, coffee, rice, wheat, iron ore, crude oil, silver, copper etc.
The three main commodity pairings are USD/CAD, AUD/USD, NZD/USD. The value of these pairs has a very close correlation to changes in the value of these countries commodities, this means that traders look to gain exposure to fluctuations in the commodities to take advantage of these pairs.
Major Currency Pairs
These are the most liquid currencies, meaning they are the most frequently traded pairings in the forex market. These pairs account for around 85% of total trading volume in the market, with the EUR/USD pair alone accounting for roughly 28% of total daily global volume. The spreads for major pairings are generally tighter in comparison to the less traded minor currency pairs. These are some examples of major currency pairs:
- Euro vs. US Dollar (EUR/USD) nickname: ‘Euro Dollar’
- British Pound vs. Us Dollar (GBP/USD) nickname ‘Cable’
- US Dollar vs Swiss Franc (USD/CHF) nickname: ‘Dollar Swissy’
- US Dollar vs. Japanese Yen (USD/JPY) nickname: ‘Dollar Yen’
- US Dollar vs. Canadian Dollar (USD/CAD) nickname: ‘Loonie’
- Australian Dollar vs. US Dollar (AUD/USD) nickname: ‘Aussie Dollar’
Minor Currency Pairs
These aren’t traded quiet as heavily as the majors, resulting in more fluctuation in value. Spreads for minor pairs are usually wider due to the medium sized liquidity in the market, these are some examples of minor currency pairs:
- Australian Dollar vs. New Zealand Dollar (AUD/NZD) Nickname: ‘Aussie Kiwi’
- Euro vs. Japanese Yen (EUR/JPY) Nickname: ‘Euro Yen’
- Euro vs. Swedish Kroner (EUR/SEK) Nickname: ‘Euro Stokkie’
- Euro vs. Norwegian Krone (EUR/NOK) Nickname: ‘Euro Nokkie’
Various other forex pairs will allow you to take advantage of macroeconomic events and political situations in specific international markets, such as the USD/MXN (US Dollar/Mexican Peso) and USD/CNH (US Dollar/Chinese Yuan).
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