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What are currency pairs

Understanding Currency Pairs in Forex Trading

In forex trading, Currency pairs are always traded in forex trading. Two currencies make up a currency pair: the quote currency and the base currency. A currency pair's price indicates the amount of the quote currency required to purchase one unit of the base currency.

Components of a Currency Pair

a) Base Currency: The first currency in the pair (e.g., EUR in EUR/USD).

b) Quote Currency: The second currency in the pair (e.g., USD in EUR/USD).

c) Exchange Rate: The value of one unit of the base currency in terms of the quote currency (e.g., if EUR/USD = 1.1000, it means 1 EUR = 1.10 USD).


Example:

EUR/USD = 1.1000 → 1 Euro = 1.10 US Dollars

GBP/JPY = 150.50 → 1 British Pound = 150.50 Japanese Yen

        Types of Currency Pairs

a) Major Pairs

These are the most traded currency pairs, involving the US Dollar (USD) and highly liquid currencies.

Examples:

• EUR/USD (Euro / US Dollar) – Most traded pair

• GBP/USD (British Pound / US Dollar)

• USD/JPY (US Dollar / Japanese Yen)

• USD/CHF (US Dollar / Swiss Franc)

• AUD/USD (Australian Dollar / US Dollar)

• USD/CAD (US Dollar / Canadian Dollar

b) Minor Pairs (Cross Currency Pairs)

These pairs do not include the US Dollar but still involve major currencies.

Examples:

• EUR/GBP (Euro / British Pound)

• GBP/JPY (British Pound / Japanese Yen)

• AUD/JPY (Australian Dollar / Japanese Yen)

c) Exotic Pairs

These pairs involve one major currency and one emerging market currency. They have lower liquidity and higher spreads.

Examples:

USD/TRY (US Dollar / Turkish Lira)

EUR/ZAR (Euro / South African Rand)

USD/MXN (US Dollar / Mexican Peso)

How Currency Pairs Work in Trading
When trading a currency pair, you are buying one currency and selling the other simultaneously.

If you BUY EUR/USD, you are buying EUR and selling USD.

If you SELL EUR/USD, you are selling EUR and buying USD.

Traders make profits based on price movements:

• If the price of EUR/USD rises, a buy (long) trade makes a profit.

• If the price of EUR/USD falls, a sell (short) trade makes a profit.

Factors Affecting Currency Pairs

• Interest Rates: Higher interest rates attract investors, strengthening a currency.

• Economic Data: GDP, inflation, and employment reports impact exchange rates.

• Geopolitical Events: Wars, elections, and policies influence currency values.

• Market Sentiment: Risk appetite or fear impacts currency movements.

Understanding currency pairs is essential for forex trading. Traders use price movements, economic indicators, and market trends to make sound decisions. Understanding how major, minor, and exotic pairs work can help you maximize your profit potential.


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