Currency Pairs Explained – Understanding the Currency Pairs in Forex Trading

Currency pairs are among the most popular questions I am always asked. Sometimes it surprises me how someone wants to trade forex while he/she still doesn’t know about currency pairs. But I should not be surprised, because we always focus on advanced topics like technical analysis, candlesticks and indicators and … that we forget about the basics. We do not consider that beginners may have difficulties in understanding the currency pairs that is the foundation of forex and forex trading.
In stock market, you trade shares of companies. You buy and sell them. You pay money to buy stocks. But what if you wanted to trade or buy and sell a currency?
In the stock market, companies’ shares are commodities and the currency you pay to buy them is the money. It is the same in any other kind of trading. You pay money to buy a commodity. In forex or foreign currency exchange, you trade currencies. So again, you have to pay something to buy something else. You pay a currency to buy another currency. You sell a currency against another currency. To be able to do that, they have created currency pairs. For example EUR-USD is a currency pair. In each currency pair, the first currency is the commodity and the second currency is the money. In EUR-USD, the first currency which is Euro is the commodity and the second currency which is USD is the money. When you buy EUR-USD, in fact you pay USD to buy Euro. No matter in what currency your forex trading account is. You can have a trading account in USD, GBP, CAD or any other currency. When you want to buy EUR-USD, your broker changes your trading account capital into USD and then pays that USD to buy Euro. This is how it works. Any trade in forex market has to be done through USD. US dollar is the main currency and is the axis of all transactions in the forex market. Any currency pair that you buy or sell has to be done through USD. However, all of these process will be done automatically and you just need to click on the buy or sell buttons.

“Long” and “Short” Position in Forex Trading

I told you that when you buy EUR-USD, in fact you pay USD to buy Euro, or you buy Euro against USD. In forex market it is possible to sell EUR-USD even before you buy it. How?
Let me give you an example.
You borrow my car for two weeks. Suddenly you see someone wants to buy the car from you with a good price like $5000 above the real price. You sell my car. But you have to return my car after two weeks, right? When it is time to return my car, you go and buy the same car exactly, but with the real price which is $5000 lower than the price that you sold my car. You return my car while you have made a $5000 profit.
This is what we do when we sell a currency pair before we buy it. You sell EUR-USD high and buy it low. You sell it low and buy it lower.
When you buy a currency pair, you take a “long” position and when you sell a currency pair, you take a “short” position. Long and short are just the terms we use in forex and stock market and they have nothing to do with the length of anything. They are just terms. Of course usually it takes “longer” for the price to go up and “shorter” to go down, because price goes up because of greed, and it goes down because of fear, and fear is much stronger than greed, and so it causes the price to go down much faster compared to the time it goes up. That’s why when you buy, they say you have a long position, because it may take a longer time for the price to go up. And when you sell, they say you have a short position because it may take a shorter time for the price to go down.
Anyway! So when we say we go long with EUR-USD it means we buy it and visa versa.

1. What are the forex major currency pairs? There are four major currency pairs in the forex market: EUR-USD ; GBP-USD ; USD-JPY and USD-CHF.
2. What are the most popular currency pairs? Among the four major currency pairs, EUR-USD is the most popular and has the highest volume of transactions. They say more than 70% of transactions in the forex world is focused on EUR-USD. But it doesn’t mean that 70% of personal forex trader like you and me trade EUR-USD only. Forex market is not limited to what forex traders do. In fact, forex traders are a very small portion of the forex market. The big transactions are done by the big InterBanks and central banks. Sometimes they do it not because of making profit, they do it because they have to. Sometime a country has to sell its own currency against another currency to lower its currency value and control its price.
The most popular currency among personal forex traders is GBP-JPY and EUR-JPY and also GBP-USD. GBP-JPY is the king of the currency pairs for private forex traders. The reason is it is so volatile and strong. Its trading signals are sharp and strong, and it has a wide movement scale. Forex traders trade GBP-JPY to make more profit, but this sword has two sharp edges. Your losses can also be bigger.
3. What are the most liquid currency pairs? EUR-USD is the most liquid currency pair because it has the highest trading volume. However, you will not have any liquidity problem in the forex market because it is such a huge market. It is not like the stock market that sometimes you can not find a buyer for the shares that you have already bought and you want to sell.
4. What are the most active currency pairs or the most volatile currency pairs? As I said, GBP-JPY is the most active and the most volatile currency pair. EUR-JPY has the second position in volatility and activity. GBP-JPY and EUR-JPY usually have the same direction. It means when one of them goes up the other one goes up too and visa versa. GBP-JPY and then EUR-JPY are the most traded currency pairs among forex traders. In general, GBP cross currency pairs are the strongest.
5. What are the best currency pairs to trade? I don’t know about the other traders, but if you ask me about the best currency pairs to trade, I say any currency pair that shows a strong and sharp signal at a time, is the best currency pair to trade. I see some traders who fall in love with a special currency pair and try to trade only that one. This is wrong. You limit yourself and ignore the free opportunities that the forex market gives you. There are several currency pairs on the forex market that you can trade. Why should you ignore all of them and focus on one pair?
They say you should focus on one currency pair and “master” it. This is another “nonsense idea”. Currency pairs are not like different jobs that you have to focus and master one of them. There is the same rules and techniques to trade all of the currency pairs. A support line breakout is a sell signal in any currency pair. Find a valid support line in a currency pair and go short after its breakout. No matter what currency pair it is. You make money. Of course don’t forget to set your stop loss

All joking aside! Do not believe everything you read and hear. Some people start writing articles and e-books when they give up on becoming a profitable forex trader. So they try to make money through selling their e-books and forex training courses. Unfortunately 95% of the books, articles and training courses are written and managed by these people. And those articles, books and training courses are the main sources of “nonsense ideas” like the one that I explained above.
Anyway

6. What are the best times to trade currency pairs? Again I have my own answer to this question and my answer can be different from the others’ answer you may find over the internet. The best time to trade a currency pair is when it forms a strong and sharp signal. Period!
This question is mainly asked by intraday traders who trade using small time frames like 5min or 15min. They want to have a trading session every day and they do not like to have any open position during the night. Whether I agree with this idea or not, I will not focus on it here because this article is about currency pairs.
There are three main sessions in forex market: London session, New York session and Asian session. London session is from 8am to 4am GMT. New York session is from 8am to 4pm EST and Asian session is from 7pm to 3am EST. Forex market has the highest volatility when both of the London and New York markets are open which is about 8am to 1pm EST. Then at 4pm EST that they close the New York, the forex market becomes so slow. But after a few hours, Japan and then Australia start working and so forex market becomes volatile again.
Back to the question that “what are the best times to trade currency pairs?”, I have to say that when forex market becomes active and volatile, all of the currency pairs move, not just some special currency pairs. It doesn’t matter what session it is. So basically this question is not a correct question. You can trade any currency pair when market is moving and there is a strong trade setup.
7. What are the exotic currency pairs? USD-SEK (Swedish krona), USD-DKK (Danish krone) and USD-NOK (Norwegian krone) are the most famous exotic currency pairs. They are called exotic because of their pip value. Their pip value is much smaller than the other currency pairs like EUR-USD. When you trade one of these pairs for the first time, you may not believe your eyes when you calculate your stop loss and take profit. A stop loss that has to be placed above the previous candlestick, has a several hundreds of pips value. But don’t scare. Those pips are not like the ones your see in other currency pairs. I call them mini pips. They are about 1/10 of the value of the normal pips.
Exotic currency pairs are not limited to those three. EUR-NOK, EUR-SEK, EUR-DKK and GBP-NOK, GBP-SEK and GBP-DKK are even more exotic

There are also many other exotic currency pairs like USD-RUB (Russian Ruble), USD-CCK (Czech Krouna), USD-HKD (Hong Kong Dollar), USD-HUF (Hungarian Forint), USD-LVL (Latvian Lats), USD-MXN (Mexican Pesos), USD-PLN (Polish Zloty), USD-ZAR (South African Rand) and … … … .
8. Do you have the currency pairs list? Each forex broker supports different number of currency pairs. However all of them support the 4 major currency pairs and most of the other popular and known currency pairs:
EUR-USD
GBP-USD
AUD-USD
NZD-USD

USD-JPY
GBP-JPY
EUR-JPY
CAD-JPY
AUD-JPY
NZD-JPY

USD-CAD
EUR-CAD
GBP-CAD

USD-CHF
EUR-CHF
GBP-CHF
CAD-CHF

USD-SGD
USD-DKK
USD-SEK
USD-NOK

EUR-AUD
GBP-AUD

EUR-GBP

AUD-NZD

9. What are the cross currency pairs and what is the currency pairs correlation? Learn about currency pairs correlation here.
We have some detailed articles about the most important currency pairs. I recommend you to read those articles too:

Pages

CURRENCY PAIRS

Currency Pairs Explained – Understanding the Currency Pairs in Forex Trading

“Long” and “Short” Position in Forex Trading

No comments:

Post a Comment