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What is a Forex currency pair and what does it represent

The currency pair is the backbone of the forex market. Its very essence. All other factors, no matter how important they are, are essentially secondary. If there were no currencies on the market, there would be nothing to trade, and nothing to analyze. Therefore, it is important to start learning forex with the basic concept of "currency pair". Try to feel the "physics of the process" and understand why the couples are different, and some are more expensive than others.

Where did currency pairs come from?

The impulse for the emergence of the term "currency pairs" forex was given by the "father-dollar". This is important to understand at the start. The influence of the world wars made the US dollar the most powerful currency. The 2nd World War had its final influence. Then America supplied Europe with resources (equipment, weapons, resources) for several years, receiving payment in gold. Having thus accumulated the largest gold and foreign exchange reserves, the United States tied the dollar to gold. It has become the most reliable currency. Then, after the war, the States provided financial assistance to the countries of the European continent, as well as Japan. In turn, it was necessary to “repay debts” in dollars. Which were printed only in the USA. That is, in order to repay a debt in USD to the United States, you must first buy USD in the same place, in the USA. For some valuable resources, at a certain rate. In addition, Germany and Italy paid reparations to the victorious country for the damage caused by the war. Also in dollars.

Today's strongest forex currency has shaken the global trade balance. Gold has ceased to be considered a benchmark for the value of goods and services, and dollars have flooded the planet.

After the recovery of the economies of European countries, in the 70s of the twentieth century, an event occurred that gave rise to trade in the financial markets. In 78, the International Monetary Fund allowed states to move away from the rigid binding of their national. currencies to the dollar and gold. Since then, free trade has been allowed and the forex currency market has begun to function. At the same time, the imbalance introduced into the market by the dollar has not gone away and affects exchange rates to this day.

Meanwhile, the economies of countries in the XX-XXI centuries. did not stand still and developed. With different rates, which brought even more imbalance in the foreign exchange market. Thus, today it is possible to express one currency through the second, through a currency pair.

What are forex currency pairs

Logically and structured, we approached the answer to the question of what a currency pair is. Now let's take a closer look at the terminology of a trading pair. The adjective "trading" is not mentioned in vain. Traders use this synonym because how do they do with currencies on the market? That's right — trade. The currency is also referred to as an “asset” by market participants.

So, from the wording “pair”, we conclude that we mean two monetary units. The entry for a currency pair looks like this "XXX/YYY". The first three letters reflect the currency of one country, after the slash — the banknote of another state. The currency on the left is called the base currency, and the one on the right is called the quote. Some traders simply say "base and quote". Why such names? The base currency is an asset that is taken as a basis, basis. The quoted one shows how many "like her" you need to give in order to buy 1 unit. "bases".

forex currency pairs

Now let's figure out what is hidden under the heading "XXX / YYY" and why there are three of each of the characters. Since America at one time spread around the world not only the dollar, but also the English language, the designations of the currencies in the pair are unified for the whole world. So that traders from Tokyo, Madrid, New York and Sydney interpret the designations in the same way. The name of the currency contains 3 capital English letters. At the same time, the first 2 indicate the name of the state, and the 3rd - the name of the monetary unit. This designation is approved by the ISO regulations (International Center for Standardization).

Understand what currency pairs are. Consider the principle of their labeling:

  • USD — US indicates the United States, and D indicates the dollar.
  • GBP — Great Britain Pound.
  • AUD — Australian Dollar.
  • NZD — New Zealand Dollar.
  • RUR — Russian Ruble.

This code is sometimes called the "ticker" of the currency pair. This is not entirely correct, the “ticker” is more applicable to other assets: stocks, stock indices, bonds. However, keep in mind that you may hear a "ticker" referring to the currency pair code.

Currency pair on an example

Let's take an example of what a currency pair is and what it expresses. As an example, let's take the TOP currency pair on the planet — this is EURO / DOLLAR. Translated into "trader" — EUR / USD. Let's simulate that the exchange rate is 1.25. Remembering the concepts of "base and quote", let's say that 1 euro can be bought for 1.25 dollars. For example, in the days of bartering, an ax was given 3 bags of grain and this "currency pair" would be written as "Ax / Bag of grain \u003d 3".

You should definitely understand that a pair is always indicated in such a way that “3 bags of grain” indicate the price for exactly 1 “axe”. It is permissible to specify a price for only one unit of the base currency.

Major currency pairs forex

The key rule of the forex market says: trading is allowed strictly within the framework of two currencies, that is, a pair. At the same time, we sell only one of them, and we buy only the second. No other is given.

It is also worth knowing that currency pairs are divided into 3 key groups. It is very important to understand them, as this will affect the choice of a beginner's trading strategy. Here are the groups:

  • Major currency pairs.
  • Cross rates.
  • Еxotic couples.

At the same time, no matter what type of steam it belongs to, it can be direct and reverse. Straight lines represent the following — the quote is expressed in dollars, pounds, Australian dollars, New Zealand dollars. Why these 4 units? The answer is obvious: the United States has already been mentioned above, but before the rise of the United States, Britain dominated the world market, while Australia and New Zealand were British colonies.

That is, when one of these monetary units is located to the right, after the slash, we are dealing with a direct currency pair.

In a mirror situation, the pair is called reverse. For example, JPY/USD is a straight pair, USD/EUR is a reverse pair.

Let's analyze each of the 3 above groups: majors, cross-rates and exotics.

Major group

Continuing the US and English theme, here the name is also in English. Major pairs, i.e. "major" — the main ones — are the national banknotes of the most economically developed world powers. Today, this includes the following countries: the United States with the dollar, Britain with the pound, Canada and the countries of the Australian continent with their own dollars, EU member states with the euro, a separate position — Switzerland with its franc, as well as Japan with the yen. Trading currency pairs of major type implies the following assets:

  • Euro/Dollar (EUR/USD)
  • Australian dollar/Dollar (AUD/USD)
  • New Zealand dollar/dollar (NZD/USD)
  • Pound/Dollar (GBP/USD)
  • Dollar/Yen (USD/JPY)
  • Dollar/Swiss franc (USD/CHF)
  • Dollar/Canadian dollar (USD/CAD)

As you can see, the number of these currency pairs is easy to count on the fingers. However, it is these pairs that “build the weather” on the global forex market. Here the Pareto principle “20% of actions give 80% of the result” is observed. Indeed, these currencies have the highest liquidity, transactions open and close faster. These currencies provide the lion's share of the volume of purchases and sales. They are popular with beginners and experienced traders when trading. Majors have the lowest spreads.

It is also easy to see that major currency pairs do not exist without the US Dollar. The American currency necessarily appears, either on the left or on the right. Acting as an "axe" or "sacks of grain". The reasons for the dollar being "everywhere" were mentioned above.

In some sources, you can find lists of majors, where there are 10 or more of them. This is not entirely correct. Only 7 combinations listed above are considered majors.

Group "Cross-courses"

The English word "cross" those "cross anything" suggests why this group is called that. These are the same major pairs, the currencies in which intersect without the participation of the US dollar. These pairs are also called minors in trader's slang.

The feature of cross currency pairs is that they are also characterized by high liquidity, while the spread value will be higher than that of the majors. In this regard, the volume of trading in minors is less, they are not so popular among traders.

At the same time, they should not be cut off and recognized as unprofitable. You just need experience and skill to trade them skillfully. The following is the currency on the forex group "cross":

  • Euro/Canadian dollar (EUR/CAD)
  • Euro/Australian Dollar (EUR/AUD)
  • Euro / New Zealand Dollar (EUR/NZD)
  • Euro/Frank (EUR / CHF)
  • Euro/Pound (EUR / GBP)
  • Euro/Yen (EUR / JPY)
  • Pound/Australian dollar (GBP/AUD)
  • Pound/Frank (GBP / CHF)
  • Pound/Yen (GBP / JPY)
  • Australia dollar/dollar (AUD / CAD)
  • Australia dollar/Franc (AUD / CHF)
  • Australia dollar/Yen (AUD / JPY)
  • Australian dollar/New Zealand Dollar (AUD/USD)
  • Canadian dollar/Yen (CAD / JPY)
  • New Zealand dollar/Yen (NZD / JPY)

We figured out that combinations of currencies of developed countries are majors. The same without the participation of the US dollar — cross rates. All other currency pairs have their own niche — exotic.

Group "Exotica"

The exotic ones include currency pairs that involve the currencies of countries with less developed economies. These are not necessarily third world countries, as is mistakenly believed. For example, the Polish zloty (PLN) is a fairly strong currency from an EU country. Or the Danish krone (DKK), originally from Scandinavia, where everything is okay with the economy. But, nevertheless, they are not classified either as majors or as crosses.

The most common options for currency pairs are a combination of a major currency and an exotic one. It is rare to see a pair with two currencies from developing countries.

At the same time, the major monetary unit is always located on the left, that is, it acts as the base currency. There is a purchase of "majors" for the currency from the "exotic" group.

Here are some of the currency pairs in question:

  • Euro/ Polish Zloty (EUR/PLN)
  • Euro/Danish krone (EUR/DKK)
  • Euro/Ukrainian hryvnia (EUR/UAH
  • Dollar/Russian ruble (USD/RUR)
  • Dollar/Mexican Peso (USD/MXN)

Here are a few currency pairs for clarity. It is pointless to list all of them, since these are purely local things and there are an “infinite” multitude of them on the market. You can get acquainted with the full list and find the currency of interest in any trading terminal by opening a demo account or a cent account there. If you are interested in Forex trading with a guarantee of attracting leads, fill out the feedback form and get a consultation.

Exotic currency pairs are not very popular. Because they are characterized by low liquidity, as well as high and floating spreads. There are also special cases — interest in an exotic pair has increased and the spread has been reduced. This is influenced by the trading policy of a particular broker.

analysis of currency pairs

Summarizing the 3 groups of trading pairs, it is worth saying that their popularity in the forex market is as follows: majors are in the lead, the second are crosses, and the third are exotic pairs. One of the factors influencing this is a large percentage of newcomers entering. Without trading experience, they choose stable pairs, with the dollar inside.

Statistics from the International Monetary Fund today show that 60% of the world's money reserves are represented by "green" banknotes. Therefore, novice players do not invent a bicycle, but start from the majors.

Analysis of currency pairs

After studying the essence of the currency, the concept of "pair" and groups of currency pairs, you can proceed to the study of their properties. The main 3 characteristics will help you choose the right pair for each. Here they are:

  • Liquidity.
  • Volatility.
  • Correlation.

The essence of the concept of "liquidity"

This parameter shows how actively trading is going on for the selected currency pair, and in what volume. Therefore, it reflects the chances of a currency pair to become as “bought” or “sold out” as possible.

The TOP-3 assets on the market in terms of liquidity include the following pairs:

  • Euro / Dollar — the percentage of closed transactions is about 30%.
  • Dollar / Yen — up to 15%.
  • Pound / Dollar — more than 10%.

High liquidity can be concluded from auxiliary indicators. Such as low spread, high speed of execution of pending orders, low percentage of slippage. An interesting fact is that the above 3 pairs are difficult to predict, but they are the most liquid. On them, traders manage to catch the balance of "stability" - "risks" - "profit"

What is the volatility of currency pairs

There is a second indicator of assets, which is closely related to the first — liquidity. This is the volatility of the currency pair. In simple words, this is a numerical expression of the volatility of the prices of currencies in a pair relative to each other. It is expressed in the absolute number of points passed during the period from the minimum to the maximum. And the price will change in any case, without it there would be no forex market.

Volatility and liquidity are interdependent in inverse proportion — the more intense one indicator, the less the other. This is logical, since pairs with little liquidity “wait” for their chance and rise / fall faster at the slightest market jumps. Volatility depends on the political situation in the country, the state of the economy and the main production sectors.

When trading in the terminal, use tools for calculating volatility. The price jump range is graphically displayed by the so-called Bollinger bands. Compression of the bands is a drop in volatility, expansion is its growth.

currency pair volatility

Volatility needs to be monitored. The higher it is, the riskier the trades. Therefore, advice to beginners is to start with low-volatility currency pairs. We remember that there are money management rules and it is better to follow them. As long as you are a beginner and the deposit is small, there is no point in trading a pair whose quote changes by 100 points up and down.

And only experience behind him allows the trader to look in the direction of highly volatile pairs. After all, what is the volatility of a currency pair — this is a factor that increases the profit at times.

Historically, the leaders in terms of volatility are such assets:

  • Euro / New Zealand dollar;
  • Pound/Yen;
  • Pound/Canadian dollar;
  • Pound/Australian dollar;
  • Pound/New Zealand dollar;

A word about correlation

Another characteristic of a currency pair that helps a trader is correlation. Shows the relationship of one asset to another. To digitize this relationship, a correlation coefficient is used. It is in the range from "-1" to "1". The closer the value is to "1", the more likely it is that if the 1st currency pair changes, the 2nd one will change in the same direction. And vice versa.

It works like this. Let's say we are interested in the USD/CAD pair. We have access to information about Canada, so we chose this pair for trading. With the help of correlation, we can understand the impact of our pair on the EUR/USD asset. Open the table of correlation coefficients (it can be found on broker sites). And we look that with a time period of one hour, the coefficient. the correlation between these 2 pairs is -0.9.

Therefore, as soon as the Canadian dollar jumps up, we understand that the EUR/USD pair will move in the opposite direction.

How to choose a currency pair

The approach must be comprehensive.

First, you need to analyze all of the above factors — to study majors, cross-rates, exotics. Analyze liquidity, volatility and correlation.

Secondly, this is still not enough. Answering the question “which currency pair to choose” unambiguously right away is the same as giving the answer “what profession to choose”. Well, here, obviously — the profession of a trader (just kidding). But seriously, when choosing a profession, a person takes into account how thoroughly he knows the matter, whether he even has a soul for this kind of activity. The same situation is with currency pairs. It is necessary, in addition to liquidity and other "dry" figures, to assess the degree of knowledge of the country's economy, politics and the situation in it. To really get profit and buzz from trading, you need to take a comprehensive approach to choosing a pair. Also consider your temperament. It is possible that on pairs with low volatility, you will simply get bored trading with low risk and low profit.

Thirdly, choose a currency pair that trades at a convenient time for you. Because trading on currency pairs takes place in real time. And no one adjusts time zones for a trader. If you take note of the Japanese yen, and at the same time live in Moscow, Kiev or Minsk, you won’t be able to trade after dinner. The Asian session is already ending at this time.

Fourth, when you decide on an asset, stop. Dedicate yourself to this one couple. Deeply study the market, analyze indicators. In addition to watching the market, a trader needs to keep in reserve the psychological and mental energy that is important for making decisions. It's not worth spraying. Only this approach is applicable if the goal is to seriously trade and make a profit.

Trending currency pairs for 2022

In the current period, you can form the best currency pairs of the online Forex market. Taking into account the fact, the trend of the current year and the forecast of the situation for several months, we can indicatively come to such conclusions.

In the short term 2021-2022 The calmest assets are:

  • Euro/Pound (EUR/GBP). During the session, the maximum volatility reaches 40 points.
  • Australian Dollar/Dollar (AUD/USD). The pair is volatile within 50 pips per session.
  • New Zealand Dollar/Dollar (NZD/USD). Fluctuations are also within 50 points.
  • Australian dollar/Yen (AUD/JPY). Trend movement by a maximum of 60 points.

The most volatile assets "for now":

  • Pound/Yen (GBP/JPY). Fluctuations reach up to 200 pips per day. Within the framework of the European platform, this is the maximum.
  • Pound/Frank (GBP/CHF). Volatility rises to 150 points.
  • Dollar/Frank (USD/CHF). Above 100, there is an upward trend towards 150 pips.
  • Pound/Dollar (GBP/USD). With very high activity, volatility reaches hundreds.
  • And finally the Euro/Dollar (EUR/USD). On average, the trend remains within 50-100. At the same time, there were cases of advancement by 300 points per day.

It is worth choosing from these pairs or "about that". What to be guided by when choosing is described in the previous sections. One has only to remember that even the most trendy pairs enter into sideways trends (flats). Therefore, if you choose several assets for trading in 2022, it is advisable to choose a “set” of instruments with a correlation coefficient tending to zero. So that in the case of a side trend for one asset, the rest do not follow it.

If, apart from news, other sources of information are not provided, it is better to include the EUR/USD pair in your “portfolio” of assets. In news trading, this is the most reliable option.

After choosing a currency — to demo and cent accounts

As it turned out earlier, a novice trader should study the theoretical part rather well, choose a currency pair for trading, then study its behavior in the market. How to study the market correctly is described in separate articles. Any forex currency online is available for analysis in trading terminals. It is necessary to practice analysis using timeframes, using fundamental, technical and computer analysis.

how to choose a currency pair

However, do not be under the illusion that you will fully explore the market for your currency pair before opening your account in the terminal. This is not true. Let's draw an analogy with football. A person can score 100 out of 100 penalties in training for years, beat opponents with ease, complete all 1v1 outings with the goalkeeper with goals. But! How will this player perform in a real match? With a full stadium of fans, TV cameras, in the rain, with increased responsibility for the result of the game. It is likely that the performance will be worse. The same is true in trading. Having accumulated some basic body of knowledge, you need to replenish them in parallel and try yourself in a real business.

Let it be a demo account or, even better, a cent account. This is a cool tool, it appeared relatively recently with many brokers. It is a complete repetition of trading on the market, with only one amendment — all deposit expenses are 100 times less. That is, you spend not a dollar, but a cent. Not euro, but eurocent. Not a ruble, but a penny.

It is also useful to use the additional options that the broker offers — the ability to trade 0.01 lots and leverage.

A little about the first option. As we know, 1 lot is 100,000 base currency. So, the forex market allows a trader to enter into a deal, while trading not a full lot, but 1/10 and even 1/100. Feel the difference between $100,000 and $1,000? The second amount is more realistic for a novice trader.

Second option. Leverage allows you to open a deal for a full lot ($100,000), while using your own funds and the broker's money in the proportion of 1% -99%. That is, a trader spends only $ 1,000 of his own deposit, entering a deal with a broker for a full lot. Profits are split accordingly.

Summary

Let's summarize. If a beginner aspires to the status of a "currency trader", you need to be patient and be ready to play "for the long haul". It is worth starting by studying the concept of "currency pair" and approaching its choice comprehensively. You need to take into account the types of assets (majors, crosses, exotics), the main characteristics of currency pairs (liquidity, volatility, correlation). In addition to digital analysis, you need to approach the questions wisely — at which session in time is it more convenient for you to trade, which pair suits you in spirit and temperament. And it is important to bring together sources of information for fundamental market analysis.

This is followed by the final choice of the currency pair. Preferably one. You should watch her for a while. Register in the trading terminal and open an account. First demo or cent. And fill your hand by placing orders and closing deals. Only this way will bring you closer to profitable trading.

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