(2)Understanding Currency Pairs & Quotes
In the Forex market , Currencies are always traded in pairs because when you buy one currency you are simultaneously selling another Understanding currency pairs ,bid /ask Prices and Spreads is essential for making informed trading decisions.
(1) Base & Quote Currency
Each Forex pair consists of two currencies
- Base Currency - The first currency in the pair
- Quote Currency - The Second currency in the pair
How to Read a currency Pair
- EUR is the base currency
- USD is the quote currency
- The number 1.1200 means 1 Euro is equal to 1.12 U.S Dollars
When you buy a currency pair ,you are buying the base currency and selling the quote currency
When You sell a currency pair ,you b are selling the base currency and buying the quote currency
Example Buying & selling a Currency Pair
- If you buy EUR/USD at 1.1200, You are buying EUR and selling USD
- If EUR/USD rises to 1.1300 ,you can sell at a higher price and make a profit
- If EUR/USD Falls to 1.1100 you sell at a lower price and take a loss
Key Concept : The base currency [is always 1 unit , and the quote currency tells you how much it is worth
(2) Bid ,Ask ,and Spread
When you look at a currency pair on a trading platform , you will see two prices
- Bid Price - The price at which the market is willing to buy the base currency
- Ask Price - The price at which the market is willing to sell the base currency
- Spread - The difference between the bid and ask price
Example : Bid /Ask pricing for EUR /USD
EUR/USD Bid price ask price
EUR/USD 1.12000 1.1202
If you want to buy EUR /USD ,you pay the ASK price 1.1202
If you want to sell EUR /USD ,You sell at the BID price 1.1200
The Spread in this case is
1.1202 (ask) - 1.12009bid) = 0.0002 or 2 pips
The spreads is the broker's fee for executing your trade.
Tighter spreads = Lower costs
Wider Spreads = higher costs (especially during volatile market conditions )
(3 )Types Of currency Pairs
currency pairs are divided into three categories
- Major Pairs - The most liquid and widely traded currencies
- Minor Pairs ( Crosses) - Pairs that do not include the U.S dollar
- Exotic Pairs - A major currency paired with a currency from a developing economy
1. Major Currency Pairs ( Most Traded & Liquid )
Major pairs involve the U.S Dollar (USD) and are the most liquid ( Hight trading volume)
Major Pair Currencies
EUR /USD EURO /US Dollar
GBP/USD British Pound / U.S Dollar
USD/JPY U.S Dollar /Japanese Yen
USD/CHF U.S Dollar / Swiss Franc
USD/CAD U.S Dollar/Canadian Dollar
AUD/USD Australian Dollar / U.S Dollar
NZD /USD New Zealand /U.S Dollar
2.Major pairs have the lowest spreads because they highly liquid
Minor Currency Pairs ( Cross Currency Pairs )
Minor Pair Currencies
EUR/GBP Euro /British Pound
EUR/JPY Euro / Japanese Yen
GBP/JPY British Pound/Japanese Yen
AUD/JPY Australian Dollar /Japanese Yen
CHF/JPY Swiss Franc /Japanese Yen
Cross pairs have slightly higher spreads than major pairs
3.Exotic Currency Pairs (High Risk & Volatility )
Exotic Pairs consist of a major currency paired with an emerging market currency
Exotic Pair Currencies
USD /TRY U.S Dollar /Turkish Lira
USD/ZAR U.S Dollar/ South African Rand
USD/MXN U.S Dollar/Mexican Peso
EUR/TRY Euro/Turkish Lira
GBP/SGD British Pound/Singapore Dollar
Exotic pairs have higher spreads and lower liquidity ,making them riskier to trade
Key Takeaways : Understanding currency Pairs & Quotes
Forex pairs always consists of a base and quote currency - The price tells you how much the base is worth in the quote currency
Bid & Ask Prices - You buy at the ask price and sell at the bid price
The Spread - The difference between the bid and ask price (broker fee)
Major Pairs - Most liquid ,Lowest spreads ( EUR /USD .GBP/USD,USD/JPY)
Minor Pairs - No USD higher Spreads than major pairs ( EUR/GBP,GBP/JPY )
Exotic Pairs - High risk ,high spread ,less liquidity 9 USD/TRY, USD,MXN)
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