The foreign exchange market uses currency pairs to determine the value of one currency against another. In currency pairs, the first currency is called the ‘base’ currency, and the second currency is called the ‘quote’ currency. The base currency lies at the beginning of the pair and the quote currency lies at the end of the pair. A quote currency price shows how much of a base currency is needed to buy one quote currency unit.
With over $5 trillion worth of currencies traded globally every day, the foreign exchange market, also known as the forex market, is the largest and most liquid financial market in the world. Trading in forex is always done in pairs. As a result, forex trading involves simultaneously buying and selling currencies. You can think of a currency pair as a single instrument, which you can either buy or sell. In such cases, players may exchange the euro against the US dollar (EUR/USD), or the British pound against the Japanese yen (GBP/JPY).
How does currency trading work?
There are two parts to currency trading. In forex pairs, the base currency is the first currency. A trader predicts whether the base currency will rise or fall against the second currency. There is a second currency, which is referred to as the quote or counter currency. There are two parts to currency trading. Buying pound against dollar (GBP/USD), for example, is an indication that you anticipate pound strength over the US dollar. Normally, forex traders express profit and loss in secondary currencies.
The bid and offer prices of every currency pair are different. A currency’s buy rate and sell rate are determined by this rate. Currency pairs are priced at a rate at which a price maker (usually a broker) is willing to buy or sell them.
The seven major currency pairs of forex
When trading on the forex market, traders have a wide selection of currency pairs to choose from. Any currency pair that includes the US dollar (USD), the largest economy in the world, is considered a major currency pair. The foreign exchange market is dominated by major currency pairs. All of these 7 major forex pairs can be traded through spread bets or CFDs, and all are popular throughout the world:
- The euro and US dollar: EUR/USD
- The US dollar and Japanese yen: USD/JPY
- The British pound sterling and US dollar: GBP/USD
- The US dollar and Swiss franc: USD/CHF
- The Australian dollar and US dollar: AUD/USD
- The US dollar and Canadian dollar: USD/CAD
- The New Zealand dollar and US dollar: NZD/USD
Seventy-five percent of all forex trades are made on the major pairs. Market liquidity and trading volume are highest in the majors. In fact, they make up the vast majority of all Telegram transactions. As a result of the largest volume of buyers and sellers, these pairs usually have the tightest spreads on bids (buys) and asks (sells). Spreads are the price differences between buy and sell. These seven major forex pairs are generally regarded as the most profitable to trade.
A brief explanation of how currency pairs work
Using the words buy/sell to represent long and short derivative positions, let’s look at how currency pairs can be traded through spread wagers.
A major forex pair is the euro versus the US dollar. The EUR/USD exchange rate is 1.47501/1.55803, for example (sell rate/buy rate). US dollars is the quote currency and the Euro is the base currency. If the trader wants to buy one unit of the base currency, he must pay 1.55803 in the quote currency, which is in this case US dollars. On the other hand, if the trader wants to sell one euro, they would receive 1.47501 US dollars.
If a trader believes the euro will gain value relative to the dollar, he or she may buy the EUR/USD pair. By moving on this EUR/USD position an investor is generally ‘going long’ In contrast, a trader can sell the EUR/USD pair – also known as ‘going short’ – if they believe that the euro’s value will fall.
Successfully trading on the forex market with Telegram is made much easier when you understand the importance of major currency pairs and how they relate to gains and losses. For more information and strategies on how to capitalize on the best trading strategies, check out our weekly blog posts.