Currency pairs are used frequently in Forex to show the relationship between one currency and another. They can simply and clearly show the exchange rate between one currency and another.
For e.g. GBPUSD = 1.5 means it will take 1.5 USD (US dollar) to buy 1 GBP (British pound). If you click ‘buy’ on GBPUSD, you are buying into GBP (the first currency, AKA the base currency) and you are selling up USD (the second currency, AKA the quote currency).
There are actually three groups of currency pairs. There are the “majors”, the “crosses” and the “exotics”.
The major currency pairs, are the ones that pair the major countries’ currencies with the USD. These majors also bear nicknames, given below:
– GBP/USD. Sterling, Cable (British pound vs. US dollar)
– EUR/USD. The Anti-Dollar (euro vs. US dollar)
– AUD/USD. Aussie (Australian dollar vs. US dollar)
– NZD/USD. Kiwi, AKA Kiwi Dollar (New Zealand dollar vs. US dollar)
– USD/JPY. The Yen (US dollar vs. Japanese yen)
– USD/CHF. Swissie (US dollar vs. Swiss franc)
– USD/CAD. Loonie (US dollar vs. Canadian dollar)
The cross currency pairs are simply the ones that pair any currencies with any other currencies excluding the dollar. For e.g. GBP/EUR (British pound vs. euro).
The exotic currency pairs are slightly more interesting since they involve emerging economies rather than developed ones. For e.g. USD/MXN (US dollar vs. Mexican peso). These exotic currency pairs are interesting but it takes a little more research and experience to do well trading exotic currencies. As a beginner trader you should start trading with the major and cross currency pairs. When you become more experienced, you could try your hand at trading with exotic currency pairs.
After understanding currency pairs, we should understand when each currency trades. Although in currency trading you can trade 24 hours a day excluding weekends, the different Foreign Exchange currencies trade in different sessions mostly:
– United States Session (8AM to 5PM EST)
– European Session (3AM to 11AM EST)
– Asian Session (5PM to 4AM EST)
Also take note that the trading week actually begins on Sunday evening at around 5PM EST and ends at around 4PM Friday evening. Between those times, the FX market is open to all.
The different sessions also carry different characteristics. The United States Session is generally quite high volume and volatile, but it is in fact second to the European Session which actually carries the most volume and volatility. The Asian Session is a lot less heavy in terms of volume and volatility. The Asian Session generally serves to form ranges while the United States and European Sessions tend to form intraday trends.
If you want to focus on one particular currency (or on a few particular currencies) you should work around the time zones and discover when each currency is most active (currencies are more active when their banks are open during business days).
In conclusion, currency pairs are very simple but they can also be categorized and we should understand the different types of currency pairs to get the most out of Forex trading. We should also understand that different currencies belong in different sessions and time zones and we should really understand the currencies that we focus on (how and when they work) to benefit the most out of currency trading.