Forex (foreign exchange) is the global market where currencies are traded. To understand the basics, it's important to grasp the concept of major currencies and currency pairs.
What Are Major Currencies?
Major currencies are the most widely traded currencies in the world. They belong to economically strong and politically stable countries, making them reliable and highly liquid. These currencies are involved in most forex transactions.
Here is a list of the major currencies, their symbols, and their nicknames (used by traders):
| Currency | Symbol | Country | Nickname |
|---|---|---|---|
| United States Dollar | USD | United States | Greenback |
| Euro | EUR | Eurozone (19 EU countries) | Fiber |
| Japanese Yen | JPY | Japan | Yen |
| British Pound | GBP | United Kingdom | Sterling or Cable |
| Australian Dollar | AUD | Australia | Aussie |
| Canadian Dollar | CAD | Canada | Loonie |
| Swiss Franc | CHF | Switzerland | Swissy |
| New Zealand Dollar | NZD | New Zealand | Kiwi |
What Are Currency Pairs?
In forex, currencies are traded in pairs, meaning you exchange one currency for another. A currency pair shows the relative value of one currency compared to another.
Each pair consists of:
- Base Currency: The first currency in the pair.
- Quote Currency: The second currency in the pair.
Example:
For EUR/USD = 1.10:
- The base currency is EUR (Euro).
- The quote currency is USD (US Dollar).
- This means 1 Euro is worth 1.10 US Dollars.
Types of Currency Pairs
Currency pairs are categorized into three types:
1. Major Pairs
These pairs always include the USD and another major currency. They are the most liquid (easiest to trade) and have the lowest transaction costs (spreads).
Examples of major pairs:
- EUR/USD: Euro vs. US Dollar
- USD/JPY: US Dollar vs. Japanese Yen
- GBP/USD: British Pound vs. US Dollar
AUD/USD: Australian Dollar vs. US Dollar
2. Minor Pairs (Cross-Currency Pairs)
These pairs do not include the USD. They involve other major currencies traded against each other.
Examples:
- EUR/GBP: Euro vs. British Pound
- AUD/NZD: Australian Dollar vs. New Zealand Dollar
EUR/JPY: Euro vs. Japanese Yen
3. Exotic Pairs
These include one major currency and one currency from a smaller or emerging market. They are less liquid and have higher transaction costs.
Examples:
- USD/TRY: US Dollar vs. Turkish Lira
- EUR/ZAR: Euro vs. South African Rand
Understanding Currency Pair Quotes
When you see a currency pair price (e.g., EUR/USD = 1.10), it represents the exchange rate. The value indicates:
- How much of the quote currency (USD) is needed to buy one unit of the base currency (EUR).
Bid and Ask Prices:
- Bid Price: The price at which you can sell the base currency.
- Ask Price: The price at which you can buy the base currency.
- The difference between bid and ask is called the spread, which is the cost of trading.
Why Trade Major Pairs?
- High Liquidity: Major pairs are traded heavily, making it easy to buy or sell without large price fluctuations.
- Low Costs: Spreads (transaction costs) are smaller for major pairs.
- Stability: Major currencies come from strong economies, making their value less volatile.
- Predictability: They are easier to analyze using technical and fundamental strategies.
Tips for Beginners
- Start with Major Pairs: Focus on EUR/USD, USD/JPY, or GBP/USD because they are stable and widely analyzed.
- Understand Market Hours: Different pairs are more active during certain sessions (e.g., EUR/USD during European and US trading hours).
- Practice with a Demo Account: Test your knowledge without risking real money.
- Learn Fundamental Analysis: News events (e.g., interest rates, employment data) significantly affect currency values.
- Use Technical Analysis: Study charts and indicators to predict price movements.