What is a currency pair?
A currency pair is a trading instrument that’s basis is the changing of one currencies value against another. The first one named in the pair is is called base currency and the second one a quote currency. Currency pairs compare the values of the first and second currency, which shows how much quote currency you need to buy base currency. They are marked with an ISO code or an three letter alphabetical code so that on an international market they corelate. For example the ISO code for USA dollar is USD.
Currency pair principles
You can trade with these pairs in the currency market, also called the forex market, which is the biggest and most liquid market in the financial world. You can buy, sell, exchange and speculate and also convert currencies for use in international trade and investing. The market is open 24 hours a day, five days a week (except holidays).
All forex transactions consist of buying one and selling another currency at the same time. When you are buying a currency pair, you buy base currency and sell quote currency. The buying price will show you how much of quote currency you need in order to buy one unit of base currency. Contrary to that, when you are selling a currency pair, you sell base currency and buy quote currency. The buying price will show you how much quote currency you get when you sell one unit of base currency.
Unlike the stock and commodity market, you are trading in currencies which means you buy one to sell another. For stocks and commodities you use money to buy a hundred grams of gold or one share of Apple. Economical information that is linked to currency pairs (interest rate, GDP information, huge economical announcements) all affect the prices of currency pairs.
Main currency pairs
The most traded currency pair is EUR/USD. It’s the most liquid pair because it is traded so much. Quotation EUR/USD = 1.2500 means that one euro is exchanged to 1.2500 USA dollars. Another way to view that- if you wish to buy 100 euros, you need to pay 125 dollars.
The total number of currency pairs changes when currencies come and go. All pairs are categorized daily by the volume they are being traded of. Currencies that are traded most often against USA dollar, are called major currencies. Those are EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD. The last two pairs are also known as raw material currencies since both Canada and Australia are rich for raw materials and both affect their prices.
Currency pairs: minor and exotic ones
Pairs that are not linked with USA dollar are called minor currencies. These pairs have a slightly wider spread and they are not as liquid as main currencies. Some examples are EUR/GBP, GBP/JPY and EUR/CHF.
Exotic currency pairs consist of evolving and developing markets currencies. These pairs are not as liquid and the spread is much wider. An example would be USD/SGD (USA dollar/Singapore dollar).