Forex trading is one of the most popular forms of trading in the financial industry. It’s a decentralized market, which means that it doesn’t have a physical location where trading takes place. Instead, it’s a global market that operates 24 hours a day, five days a week. Forex trading involves buying one currency while simultaneously selling another currency. The currencies are traded in pairs, and the value of each currency is determined by its exchange rate against the other currency in the pair. In this article, we will explain how forex pairs work.
Currency Pairs
In forex trading, a currency pair is a combination of two different currencies that are traded against each other. The first currency in the pair is called the base currency, while the second currency is called the quote currency. The exchange rate of a currency pair is the value of the base currency in relation to the quote currency.
For example, the EUR/USD currency pair is a combination of the Euro and the US Dollar. The EUR is the base currency, and the USD is the quote currency. If the exchange rate of the EUR/USD pair is 1.2000, it means that one Euro is worth 1.2000 US Dollars.
Types of Currency Pairs
There are three types of currency pairs in forex trading: Major pairs, Minor pairs, and Exotic pairs.
Major Pairs
Major pairs are the most commonly traded currency pairs in the forex market. They are the most liquid and have the lowest spreads. The major pairs are:
– EUR/USD (Euro/US Dollar)
– USD/JPY (US Dollar/Japanese Yen)
– GBP/USD (Great British Pound/US Dollar)
– USD/CHF (US Dollar/Swiss Franc)
– AUD/USD (Australian Dollar/US Dollar)
– USD/CAD (US Dollar/Canadian Dollar)
– NZD/USD (New Zealand Dollar/US Dollar)
Minor Pairs
Minor pairs are also known as cross-currency pairs. They are less commonly traded than the major pairs and have wider spreads. These pairs do not include the US Dollar, and they are traded between two major currencies. The minor pairs are:
– EUR/GBP (Euro/Great British Pound)
– EUR/JPY (Euro/Japanese Yen)
– GBP/JPY (Great British Pound/Japanese Yen)
– AUD/CAD (Australian Dollar/Canadian Dollar)
– AUD/JPY (Australian Dollar/Japanese Yen)
– CHF/JPY (Swiss Franc/Japanese Yen)
– NZD/JPY (New Zealand Dollar/Japanese Yen)
Exotic Pairs
Exotic pairs consist of one major currency and one currency from an emerging economy. They are the least commonly traded pairs, and they have the widest spreads. The exotic pairs are:
– USD/MXN (US Dollar/Mexican Peso)
– USD/ZAR (US Dollar/South African Rand)
– USD/TRY (US Dollar/Turkish Lira)
– USD/SGD (US Dollar/Singapore Dollar)
– USD/HKD (US Dollar/Hong Kong Dollar)
How Forex Pairs Work
Forex pairs work by trading one currency against another currency. The value of the currency pair is determined by the exchange rate of the base currency against the quote currency. The exchange rate is determined by the supply and demand of the currencies in the pair.
For example, if the demand for the Euro is high, and the supply is low, the value of the Euro will appreciate against the US Dollar. This will cause the exchange rate of the EUR/USD pair to increase. On the other hand, if the demand for the US Dollar is high, and the supply is low, the value of the US Dollar will appreciate against the Euro. This will cause the exchange rate of the EUR/USD pair to decrease.
Factors that Affect Forex Pairs
Several factors affect the exchange rate of currency pairs, including:
– Economic Data: Economic data such as GDP, inflation, and employment reports can affect the exchange rate of currency pairs.
– Central Bank Policy: Central bank policies such as interest rate decisions and quantitative easing can affect the exchange rate of currency pairs.
– Geopolitical Events: Geopolitical events such as elections, wars, and natural disasters can affect the exchange rate of currency pairs.
– Market Sentiment: Market sentiment refers to the overall attitude of traders towards a particular currency. If traders are bullish on a currency, the exchange rate of the currency pair will increase. If traders are bearish on a currency, the exchange rate of the currency pair will decrease.
Conclusion
Forex trading involves buying one currency while simultaneously selling another currency. The currencies are traded in pairs, and the value of each currency is determined by its exchange rate against the other currency in the pair. There are three types of currency pairs in forex trading: Major pairs, Minor pairs, and Exotic pairs. The exchange rate of a currency pair is determined by several factors, including economic data, central bank policy, geopolitical events, and market sentiment.
