Forex basics: Understanding currency pairs

Julie Brownlee, Fsp Invest, 02 Apr. 2015

Tags: forex, currency pairs, currencies, trading forex, trading currencies, major currencies, what currencies to trade,

When you look at the prices of currencies, you’ll notice that one currency’s value is always in relation to the value of another currency. In other words, currencies come in pairs.

So why do currencies come in pairs? And which currency pairs should you trade?

Read on to find out…

Why do currencies come in pairs?

If you’re interested in forex trading, chances are you’ve looked at some quotes of currency prices. You’ll see they all come in pairs.

You can gauge the value of one currency by comparing it to the value of another currency.

The easiest way to think about a currency pair is that it’s a single unit. You can’t trade one currency, they always trade in pairs.

When you trade forex, you buy one currency and sell another at the same time.

For example, you buy rands with dollars as you think the price of the rand will increase in comparison to the dollar. If the rand rises (strengthens) against the dollar, you can sell it and bank a profit. This is because you’ll receive more dollars when you sell than you initially bought in rands.

What currency pairs should you trade?

Of course there are so many currencies available across the world to trade. But to maximise your chances of making a profit, you should stick to the world’s major currencies.

The major currencies are the most liquid and this means their spreads are narrower too.

The top five currencies are:

  • The US dollar;
  • The euro;
  • The yen;
  • The pound; and
  • The Swiss franc.

The Canadian dollar and the Australian dollar are also popular currencies to trade.

You could concentrate on trading combinations of these major currencies, such as the dollar and the euro.

If you trade minor and exotic currencies, they’re less liquid and will have bigger spreads.

So there you have it, understanding currency pairs.

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