There are many interesting factors that distinguish the global forex market, from its immense daily trading volumes to the fact that it’s open 24 hours a day (and for six days each week).
Interestingly, the forex market also comprises more than 170 global currencies, from major assets such as the US Dollar (USD) and the Pound sterling (GBP) to minor and exotic options like the Thai Baht (TBH).
In this post, we’ll explore currency pairs in further detail, while asking how you can trade them on the foreign exchange.
1What is a Currency Pair?
In simple terms, a currency pair is the quotation of two different currencies, with the value of the first (the base currency) quoted directly against the other (the quote currency).
This calculation is based on fluctuating, real-time exchange rates, which partially explains why the forex market boasts such high levels of volatility.
This rate indicates how much of the quote currency is required to purchase a single unit of the base currency, while all assets of this type are identified by a three-letter ISO currency code that allows for rapid recognition in the marketplace.
Due to the ease with which currencies can be bought and sold, the forex market is also renowned for its high levels of liquidity.
The high-volume EUR/USD currency pair is currently considered to be the most liquid asset of its type in the current marketplace, for example, with the USD/JPY also highly popular as a result of its relative predictability and stability.
2How to Trade Currency Pairs
Generally, currency pairs are traded as derivatives, with this offering considerable flexibility to investors during times of increased or sustained volatility.
When an order is placed for a currency pair, the base currency is bought while the quote currency is sold. However, investors don’t need to assume direct ownership on the underlying asset, as they can instead speculate on the trajectory of currency pairs and profit even in a depreciating market.
In terms of selecting viable trading pairs, you’ll first need to recognise that not all currency pairs move in a similar fashion.
Some spend the majority of their time trading within narrow ranges, for example, whereas others tend to move in strong and clearly-defined trends. Major pairings like the aforementioned USD/JPY or the GBP/EUR offer examples of the former, while minor alternatives such as the GBP/AUD fluctuate more wildly thanks to their increased volatility.
You’ll need to use reputable brokers to track and monitor these trends in real-time, particularly when trading more volatile pairs. When starting out, however, we’d recommend starting small with a couple of major currency pairs, which are more predictable and easier to predict over time.
However, more experienced traders who base their strategy on moving average will benefit most from a currency pair that moves in strong trends, making minor assets that feature commodity-driven economies the most appealing.