A currency pair is the quotation of two different currencies, where the value of one currency is quoted against the other. It represents the rate at which one currency can be exchanged for another in the forex market.
Structure:
A currency pair is written as:
Base Currency / Quote Currency
Example:
EUR/USD = 1.1000
This means 1 Euro (EUR) is equal to 1.10 US Dollars (USD).
- EUR = Base Currency (the first currency)
- USD = Quote Currency (the second currency)
Types of Currency Pairs:
- Major Pairs
- Most traded and liquid, always involve USD
- Examples:
- EUR/USD (Euro / US Dollar)
- GBP/USD (British Pound / US Dollar)
- USD/JPY (US Dollar / Japanese Yen)
- Minor Pairs (Cross Pairs)
- Do not include USD but involve other major currencies
- Examples:
- EUR/GBP (Euro / British Pound)
- AUD/JPY (Australian Dollar / Japanese Yen)
- Exotic Pairs
- Include one major currency and one from an emerging economy
- Examples:
- USD/TRY (US Dollar / Turkish Lira)
- EUR/ZAR (Euro / South African Rand)
How Trading Works:
When you buy a currency pair, you are:
- Buying the base currency
- Selling the quote currency
When you sell a currency pair, you are:
- Selling the base currency
- Buying the quote currency
Example Trade:
You go long (buy) on EUR/USD at 1.1000
- You believe the Euro will rise against the Dollar.
- If the price goes up to 1.1200, you can sell for a profit.
- Currency Pair – Two currencies traded against each other (e.g., EUR/USD)