Forex pairs are the most traded financial assets in the world. They are a combination of two different currencies and are traded in the foreign exchange market. There are many factors that determine the movement of a forex pair, but the order of the pair is one of the most important ones. In this article, we will explain how the order of a forex pair affects its movement in the market.
To understand how the order of a forex pair affects its movement, we first need to understand how forex pairs are structured. Forex pairs consist of a base currency and a quote currency. The base currency is the currency that comes first in the pair, and the quote currency is the currency that comes second. For example, in the EUR/USD pair, the euro is the base currency, and the US dollar is the quote currency.
The order of a forex pair can affect its movement in two ways: the direction of the movement and the magnitude of the movement. Let’s take a look at each of these in more detail.
Direction of movement
The direction of the movement of a forex pair is determined by the relative strength of the two currencies in the pair. If the base currency is stronger than the quote currency, the pair will move up, and if the quote currency is stronger than the base currency, the pair will move down.
For example, let’s say that the EUR/USD pair is currently trading at 1.1200. If the euro becomes stronger than the US dollar, the pair will move up, and the price will increase. On the other hand, if the US dollar becomes stronger than the euro, the pair will move down, and the price will decrease.
Magnitude of movement
The magnitude of the movement of a forex pair is also affected by the order of the pair. This is because the base currency is the currency that is being bought or sold, and the quote currency is the currency that is being used to buy or sell the base currency.
If the base currency is the currency that is being bought, the magnitude of the movement will be larger than if the base currency is the currency that is being sold. This is because when you buy a currency, you are effectively betting on its strength, and you are putting your money behind that bet. If you are right, you will make a larger profit than if you are wrong.
For example, let’s say that you believe that the euro will become stronger than the US dollar, and you decide to buy the EUR/USD pair. If you are right, the magnitude of the movement will be larger than if you had decided to sell the pair instead.
On the other hand, if the base currency is the currency that is being sold, the magnitude of the movement will be smaller. This is because when you sell a currency, you are effectively betting against its strength, and you are not putting your money behind that bet. If you are right, you will make a smaller profit than if you had bought the currency instead.
For example, let’s say that you believe that the US dollar will become stronger than the euro, and you decide to sell the EUR/USD pair. If you are right, the magnitude of the movement will be smaller than if you had decided to buy the pair instead.
Conclusion
In conclusion, the order of a forex pair can have a significant impact on its movement in the market. The direction of the movement is determined by the relative strength of the two currencies in the pair, while the magnitude of the movement is affected by whether the base currency is being bought or sold. Understanding the order of a forex pair is essential for successful trading in the foreign exchange market.
