Forex pairs, also known as currency pairs, are the two currencies that are exchanged in a Foreign Exchange (Forex) transaction. There are hundreds of currency pairs available in the Forex market, but some are more popular than others. In this article, we will discuss what Forex pairs are, how they work, and why they are important.
What are Forex Pairs?
Forex pairs are two currencies that are traded against each other in the Forex market. The currencies are identified by their three-letter codes, such as USD (US dollar), EUR (Euro), and JPY (Japanese yen). The first currency in the pair is called the base currency, while the second currency is called the quote currency.
For example, if you are trading the EUR/USD pair, the EUR is the base currency, and the USD is the quote currency. This means that you are buying or selling Euros while simultaneously selling or buying US dollars.
Types of Forex Pairs
There are three types of Forex pairs: major pairs, minor pairs, and exotic pairs.
1. Major Pairs: Major pairs are the most popular Forex pairs and account for about 80% of all Forex trading. These pairs include the US dollar and another major currency, such as the Euro, Japanese Yen, British Pound, Swiss Franc, Australian Dollar and Canadian Dollar.
2. Minor Pairs: Minor pairs, also known as cross-currency pairs, are currency pairs that do not include the US dollar. These pairs are less popular than the major pairs but can still be traded in the Forex market. Examples of minor pairs include EUR/GBP, AUD/CAD, and CAD/JPY.
3. Exotic Pairs: Exotic pairs are currency pairs that include one major currency and one currency from a developing or emerging economy. These pairs are less liquid than the major and minor pairs and have wider bid-ask spreads. Examples of exotic pairs include USD/MXN (US Dollar/Mexican Peso), USD/ZAR (US Dollar/South African Rand), and USD/BRL (US Dollar/Brazilian Real).
How Do Forex Pairs Work?
Forex pairs work by showing the exchange rate between two currencies. The exchange rate is the value of one currency in relation to the other. For example, if the EUR/USD pair is trading at 1.1800, it means that one Euro is worth 1.1800 US dollars.
When you trade Forex pairs, you can either buy or sell the base currency. If you believe that the value of the base currency will increase in relation to the quote currency, you would buy the pair. If you believe that the value of the base currency will decrease in relation to the quote currency, you would sell the pair.
Why Are Forex Pairs Important?
Forex pairs are important because they allow traders to speculate on the exchange rate between two currencies. Traders can profit from changes in the exchange rate by buying or selling the pair at the right time.
Forex pairs are also important because they are used for international trade and investment. When companies do business with other countries, they need to exchange their local currency for the currency of the country they are doing business with. Forex pairs allow them to do this.
Conclusion
Forex pairs are the two currencies that are exchanged in a Forex transaction. There are three types of Forex pairs: major pairs, minor pairs, and exotic pairs. Forex pairs work by showing the exchange rate between two currencies, and traders can profit from changes in the exchange rate. Forex pairs are important for international trade and investment.
