Understanding the Major Currency Pairs in Forex Trading

If you want to learn more about trading Forex online, you have to learn about currency pairs first. The good news is that the basics are simple, and the way in which pairs are quoted works the same for all currencies. From the most popular, and regularly traded ones, to the more exotic FX pairs.

The most popular traded currency pairs are known as the majors. But before we look at which are the major FX currency pairs, we need to look at what a currency pair actually is. All financial traders commonly seek a profit by speculating on the changing value of an instrument, such as the share price of a company, or the worth of a commodity.

Where Forex trading differs slightly is that you are speculating on the value of one currency, relative to the value of another. When the two currencies involved are grouped and valued against each other, they known as a currency pair.

This relative value is expressed as how many units the first currency is worth in relation to the second currency. So if the US dollar is being valued against the Japanese Yen, and the exchange rate was 113.00, it would mean that one dollar was worth 113.00 yen. It really is that simple. Arguably, the best way to start trading currencies and gain an initial understanding of them is to try them out on a demo account.

This way, you avoid risking your capital, as you can trade in a risk-free trading environment with virtual funds, until you are ready to transition to a live account.

How to Read Currency Pairs

Let’s look at an example to help learn how to read currency pairs:

If you were to look at live Forex prices on a trading platform, you would see a wide variety of Forex currency pairs listed. Every currency has a three-letter ISO ( International Organization for Standardization) symbol, and they are fairly straightforward.

For example:

• GBP is the British Pound
• USD is the US Dollar
• JPY is the Japanese Yen
• CHF is the Swiss Franc.

Let’s say you believe that the Euro is set to weaken because of low Euro inflation, and that there is an increased chance of looser monetary policy from the European Central Bank (ECB). In the currency pair list, you can see the Euro quoted against both the US dollar and the British pound. The advantage Forex trading offers, is that it allows you to pick which currency you think the Euro will weaken against the most.

Let’s say that you think the US dollar has a good chance of strengthening against the Euro: this might be because you think the Federal Reserve is more likely to tighten monetary policy, while the ECB is simultaneously operating a looser policy.

The currency pair you are therefore interested in, is the Euro versus the US Dollar (EURUSD). To the right of the symbols for the currency pairs, there are rates at which you are able to trade. The bid is the rate that you are able to sell a currency pair at, and the ask is the rate at which you are able to buy. These are also known as the ‘bid’ and ‘offer’, or ‘sell’ and ‘buy’ prices.The difference between the two prices is known as the market spread.

Supposing that you think the Euro will weaken, and the US Dollar will strengthen, you will likely want to sell the Euro and buy the US dollar.

Remember: a currency pair expresses how much one currency is worth relative to another currency, so the price quoted for the currency pair is the number of dollars per Euro. If you are right and the Euro weakens, one Euro will be worth fewer US dollars. In other words, the exchange rate will have gone down. So you would be selling EUR/USD in the hopes that the rate goes down, and the rate you deal at would be the bid price of 1.1036.

You always deal at the ‘bid’ if you are selling the first-named currency, and at the ‘ask’ if you are buying the first-named currency. If you’d like to learn more about Forex price quotes, why not check out our dedicated article on the topic?

Understanding and Reading Forex Quotes

To reiterate, you sell if you think an exchange rate will go lower, and you buy it if you expect it to rise. You may have noticed in the list of currency pairs that the Euro was quoted first against the US dollar, but second when as part of a currency pair with the British pound. In theory: either currency can come first (the rate being inverted if the order is reversed) but in practice there are commonly-adopted conventions that place currency pairs in a certain order.

Generally, the US dollar comes first in a pair, with the notable exception of when it is quoted against the Euro or the British pound.

Trading With A Demo Account

Trader’s also have the ability to trade risk-free with a demo trading account. This means that traders can avoid putting their capital at risk, and they can choose when they wish to move to the live markets. For instance, Admiral Markets’ demo trading account enables traders to gain access to the latest real-time market data, the ability to trade with virtual currency, and access to the latest trading insights from expert traders.