Currency Pair - Investopedia
The most popular pairs are EUR/USD, GBP/USD, USD/JPY. They have a high liquidity and the largest trading volume in the foreign exchange market. In addition, trading on the EUR/USD currency pair, as a rule, has fewer slippages and lower spread.
The most traded currency pairs in the world are called the Majors . They involve the currencies euro , US dollar , Japanese yen , pound sterling , Australian dollar , Canadian dollar , and the Swiss franc .
The currency to the left is called the base currency. The currency to the right is called the quote the currency. The quote currency tells us how much it is worth against 1 unit of the base currency. So if we say the EURUSD is trading at it means 1 euro equals $.
Trading of currency pairs are conducted in the foreign exchange market , also known as the forex market. It is the largest and most liquid market in the financial world. This market allows for the buying, selling, exchanging and speculation of currencies, but also allows for the conversion of currencies for international trade and investment. The forex market is open 24 hours a day, five days a week (except holidays), and sees a huge amount of trading volume.
A currency pair refers to the quotation of the value of one currency in comparison to another . It is common to refer to the currency used as quote currency or counter currency. The currency quoted in relation, represented first in the currency pair, is the base currency or the transaction currency. A currency pair essentially shows how much of the quote currency you need to purchase one unit of the base currency.
Sure, I understood the very basics of currency pairs before I opened a live trading account, but I certainly didn’t know as much as I should have.
Notice a little pattern here? That’s right. The US dollar is always present for every major pair. That is because the dollar is the world’s leading reserve currency. It’s involved in about 88% of currency trades.
In the fiat world, the most commonly used base currency is the US Dollar, the largest global reserve currency. It’s not only widely used to process international transactions but it’s also the guideline for valuing all the different international currencies. So, when someone says that the Euro is getting stronger, it usually means that it’s appreciating compared to the USD.
2- If you know the currency pairs correlations, it may help you to predict the direction and movement of a currency pair.
Let’s start with the fact that depending on the fundamental characteristics, currency pairs are divided into 3 groups:
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This two-part article will first address the question “which currency pairs are best to trade?”, and next week we will address the question “what are the best times to trade?” You should use this two-part article series as a reference guide to answer any question you may have about which currency pairs to trade and what times to trade them. Enjoy.
For this post we downloaded historical prices for nine Forex currency pairs from Interactive Brokers TWS using our IB Data Downloader , however price data can be obtained any number of ways, which is really not important for this example. Sample data files used in this example can be downloaded here: historical_data_forex_jul2015 . Each file contains a little more than 12000 rows.
Through the rest of this article, I’m going to break down the risk of trading too many pairs in greater detail, in addition to how you can choose the right currency pairs to trade.