Types of Currency Pairs in The Forex Market

Forex, or the “foreign exchange” market is a global financial market that provides people with the opportunity to exchange and trade currencies. The Forex market involves multinational companies, banks, large financial institutions, businessmen, and natural persons exchanging a wide variety of currencies like pounds, dollars, euros, yen, and others. On the foreign exchange market, one currency is converted into another currency, and a significant volume of these transactions are made to purchase and sell goods, as well as to invest in individuals and companies. Most currency exchange transactions are conducted for profit, of course.

What is a currency pair?

The term “currency pair” refers to the pair of two different national currencies that are valued against one another. The purpose of a currency pair is to compare the value of a country’s currency against another country’s, and for this market, no single currency is meaningful by itself. A wide range of currency pairs are available for trading on the Forex market, which is open 24 hours a day, unlike the stock market. With Forex traders from every corner of the world exchanging currencies, it is possible for them to trade at any time and any place in the world, regardless of their time zone. Forex allows currencies to be converted between each other. One currency can be sold while another is bought at the same time. Currency pairs on the Forex market have the same rate, which is displayed with five decimal digits. The rate represents the amount to be paid in a purchase and sale transaction.

A few key points about the Forex market

• Currency pairs consist of two currencies whose values are compared against one another.
• Currency trading involves two different currencies. An individual who wishes to purchase one of the currencies sells the other currency. For instance, when buying the EUR/USD currency pair, he sells the USD and buys the EUR.
• It is easier to buy and sell major currency pairs than other currency pairs, since they have a greater degree of liquidity. Since secondary currency pairs are not correlated with the US dollar, they are less liquid and more difficult to sell.
• The price of currency pairs is affected by several factors, including economic and political ones.

Defining the concept of the base currency and the second currency

Currency pairs on the Forex market consist of two types of currency. The base currency and the second currency. The base currency is the currency upon which the price ratio is calculated and based and it is displayed on the left side. A EUR/USD pair, for example, has the euro as the base currency and the dollar as the second currency. Suppose you know that the euro currency is going to increase in the future, and that the increase percentage will be greater than the dollar currency, that is, the ratio of the dollar to the euro will decline; therefore, you choose the EUR/USD currency pair. It is essential that your capital is in the form of dollars in order to be able to execute your transaction.

In the Forex market, how should a currency pair be read?

In the Forex market, currency pairs are written from two separate currencies. The base currency is the first currency in a Forex currency pair, while the second currency is called the quote currency (counter currency). It is possible to identify a currency by its currency code, which is made up of three letters. The first two letters refer to the country’s name and the third letter refers to the country’s currency. As an example, USD stands for United States dollar.

Buying currency pairs

Buying a currency pair on the Forex market is a lot like buying stocks in the stock market. When someone buys stocks, they exchange money for the shares of a company or a product. When they buy a currency pair, they exchange one currency for another. A person who buys the euro, for example, must sell the US dollar and vice versa.

Currency pair buying and selling: how does it work? When buying dollars, for instance, you pay the euro value, and when selling dollars, you receive the euro value. In this case, we have the EUR/USD currency pair. How is profit calculated in this transaction? A purchase transaction is profitable when the value of the base currency, in this case the dollar, increases. In this case, if the value of the base currency decreases, i.e. the rial to dollar ratio increases, then you are the winner of the sale.

In the Forex market, currency pairs fall into their own categories and can be broken into three groups.

1. Major currency pairs
2. Secondary currency pairs
3. Exotic or unusual currency pairs

Major pairs

In the Forex market, there are seven major currency pairs that are considered the most popular and most tradable assets.

A few tips on major currency pairs

• All major currency pairs have the US dollar on one side, and a highly liquid, powerful currency on the other.
• Japanese “Yen” is the sole Asian currency included in the list of major currency pairs, which indicates the country’s strong economy and high currency value.
• There are only these few currency pairs with nicknames on the Forex market. It means that the major currency pairs benefit from high exchange rates, and many traders are interested in them.

Minor currency pairs

Exotic currency pairs

The exotic currency pair has one side with main currencies and the other side with economic and developing currencies. Taking NZD/SGD as an example, it is New Zealand dollar to Singapore dollar. Trading this currency pair of a major currency is possible with any other currency. Compared to other currency pairs on the Forex market, exotic currency pairs have a smaller share and usually do not fluctuate as much.

Forex trading’s best currency pairs

Thus far, we have examined the concept of currency pairs and their types. Now let’s look at the best Forex currency pairs. The dollar is highly valued and is the most traded currency in the world, and can be used worldwide for business transactions. In this respect, the main currency pairs are considered to be the best currency pairs for traders. The main currency pairs have a high trading volume during the day and have a high level of liquidity. The high liquidity means that should you sell these currency pairs, the transaction will take place quickly since there is a high level of demand. Additionally, the United States enjoys economic stability, so currency pairs containing the dollar are less volatile and have a more stable trend.

The dollar to euro currency pair and vice versa are, therefore reasonable choices when it comes to entering the Forex market and making transactions.

Why should we focus on just a few currency pairs?

Many newcomers to the market wonder why it is recommended to focus on one or at most three currency pairs in the Forex market? There is no doubt that limiting the number of currency pairs you choose reduces risk and allows you to focus more on buying and selling and learning the trade.

Conversely, traders should look for pairs of currencies that are universal and valid on both sides; since they offer higher buy/sell volumes and are easier to trade.

How to choose currency pairs?

The key to choosing the right currency pair is entering the field with adequate knowledge and awareness. In the Forex market, professional traders are usually looking for a few currency pairs and they focus their attention on one or at most three currency pairs from the list of Forex market currency pairs. It is therefore a good idea to choose at least one or two value pairs among the Forex currency pairs. You should also look for currency pairs with high trading volumes. Since this high volume of transactions can lower volatility and increase liquidity. It is always important to keep yourself up to date on the news of countries and to keep in mind that they always have the greatest impact on the foreign exchange market.

What are currency correlations?

Correlation between currencies or currency correlation is a crucial concept in the Forex market. Currency correlation is a statistical tool that analyzes the relationship between two pairs of currencies and the trends in their prices. It is well known that currencies are priced in pairs on the Forex and digital currency markets, and these pairs are never traded separately.

In the Forex market, currency correlation refers to the relationship between two separate currencies, which can be positive or negative. Currency pairs with positive correlation move in the same direction, while currencies with negative correlation move against one another. Thus, the correlation between currency pairs is due to the fact that they are paired.

Therefore, the currency correlation indicates whether the two currencies in a pair move in the same direction as one another, the opposite direction, or they move randomly over time.

• Correlation is a statistical criterion that indicates the relationship between two variables. The greater the correlation coefficient, the more aligned the variables are.
• Positive correlation occurs when the values of the two variables move in the same direction, and negative correlation occurs when they move in the opposite direction.
• Correlations are used in the Forex markets to identify exchange rates that have a tendency to move together.
• The use of negative correlation currencies is also possible for coating purposes.

The coefficient of correlation

The correlation coefficient is calculated according to its own mathematical formula. By applying this formula, a number between +1 and -1 will result. This coefficient specifies the type of relationship between the currencies and alters the proportion between two series of numbers. Essentially, positive correlation coefficients or +1 correlation coefficients indicate the same direction of movement of a currency pair. Likewise, a negative correlation or correlation coefficient of -1 indicates the opposite direction of the currency pair.

Additionally, if the correlation coefficient is zero, it means that the movement of two currencies has no correlation or that the two are completely unrelated and independent of one another.

The Forex market correlation coefficients

1. Intraclass
2. Rank
3. Pearson

The final word

We have introduced you to the Forex market, the list of Forex symbols, and the types of currency pairs in this article. In addition, we learned about the Forex market’s best choice and how to get started trading.

As a matter of fact, the key to success in this market is to know the Forex market well, to possess complete knowledge and to have experience. Experience and knowledge are developed over time and through familiarity with the market. All capital markets, including the Forex market, are aimed at making profit. Your profitability can be greatly enhanced by knowing the trend of currency pairs.

To conclude, it is important to know everything there is to know about the market before choosing the right currency pair. Also make sure to identify your temperament and personality, as well as your risk tolerance. Combine all of these with your trading strategy and then enter the market.