Currency Pairs

What Are Currency Pairs?

In the Forex market, you never trade a single currency in isolation. Currencies are always traded in pairs because every foreign exchange transaction involves simultaneously buying one currency and selling another. Examples include EUR/USD, GBP/JPY, and USD/THB.

Every currency pair consists of two components:

• Base Currency: The currency on the left side. This is the currency you are "buying" or "selling"
• Quote Currency: The currency on the right side. This currency is used to express the price of the base currency

Reading a Currency Pair

EUR/USD = 1.0850

This reads: 1 Euro equals 1.0850 US Dollars

• If you Buy EUR/USD, you are buying Euros and selling US Dollars simultaneously
• If you Sell EUR/USD, you are selling Euros and buying US Dollars simultaneously

What Price Movements Mean

• EUR/USD rises from 1.0850 to 1.0900 = The Euro has strengthened against the Dollar (or the Dollar has weakened)
• EUR/USD falls from 1.0850 to 1.0800 = The Euro has weakened against the Dollar (or the Dollar has strengthened)

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Currency Codes (ISO 4217)

Every currency in the world has a three-letter code assigned by the International Organization for Standardization (ISO). The first two letters usually represent the country, and the third letter represents the currency name.

Major Currencies

| Code | Currency | Country | Nickname |
|---|---|---|---|
| USD | US Dollar | United States | Buck, Greenback |
| EUR | Euro | Eurozone (20 countries) | Fiber |
| JPY | Japanese Yen | Japan | Yen |
| GBP | British Pound Sterling | United Kingdom | Cable |
| AUD | Australian Dollar | Australia | Aussie |
| CAD | Canadian Dollar | Canada | Loonie |
| CHF | Swiss Franc | Switzerland | Swissy |
| NZD | New Zealand Dollar | New Zealand | Kiwi |

Fun Fact: GBP/USD is nicknamed "Cable" because in the 19th century, the exchange rate between the British Pound and the US Dollar was transmitted via a transatlantic telegraph cable laid under the ocean floor.

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Categories of Currency Pairs

Currency pairs are classified into three main categories:

1. Major Pairs

Major pairs always include USD on one side and are the most heavily traded pairs in the world. They account for approximately 75% of all Forex trading volume.

| Pair | Name | Key Characteristics |
|---|---|---|
| EUR/USD | Euro/Dollar | Most traded pair in the world (~23% of volume). Tight spreads |
| USD/JPY | Dollar/Yen | Second most traded. Influenced by Bank of Japan policy |
| GBP/USD | Pound/Dollar | Volatile with wide price swings. Sensitive to UK economic data |
| USD/CHF | Dollar/Swiss | Considered a safe-haven pair |
| AUD/USD | Aussie/Dollar | Commodity-linked. Sensitive to Chinese economic data |
| USD/CAD | Dollar/Loonie | Strongly correlated with crude oil prices |
| NZD/USD | Kiwi/Dollar | Commodity-linked. Influenced by dairy prices |

Advantages of Major Pairs:

• Tightest spreads (lowest trading costs)


• Highest liquidity


• Most predictable responses to economic news


• Abundant analysis and educational resources available

2. Cross Pairs (Crosses)

Cross pairs do not include the US Dollar. They are created by pairing two major currencies directly.

| Pair | Name | Key Characteristics |
|---|---|---|
| EUR/GBP | Euro/Pound | Relatively stable, lower volatility |
| EUR/JPY | Euro/Yen | Popular carry trade pair. High volatility |
| GBP/JPY | Pound/Yen | Known as "The Dragon" or "The Beast" for extreme volatility |
| AUD/NZD | Aussie/Kiwi | Range-bound. Good for range trading strategies |
| EUR/CHF | Euro/Swiss | Historically stable but can have sudden moves |
| EUR/AUD | Euro/Aussie | Good volatility for swing traders |

Key Note about Cross Pairs:

• Wider spreads than major pairs


• Can be more volatile


• Fewer educational resources and analysis available


• Some crosses have strong correlations with specific commodities

3. Exotic Pairs

Exotic pairs consist of one major currency paired with a currency from an emerging or smaller economy.

| Pair | Description |
|---|---|
| USD/THB | US Dollar / Thai Baht |
| USD/TRY | US Dollar / Turkish Lira |
| USD/ZAR | US Dollar / South African Rand |
| USD/MXN | US Dollar / Mexican Peso |
| EUR/TRY | Euro / Turkish Lira |
| USD/SGD | US Dollar / Singapore Dollar |

Characteristics of Exotic Pairs:

• Very wide spreads (high trading costs)


• Low liquidity, meaning larger slippage


• Extremely volatile, especially during political or economic crises


• Can carry overnight swap costs that are significantly higher


• Not recommended for beginners

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Currency Correlations

Currency pairs do not move independently. They often have relationships with each other known as correlations.

Positive Correlation

When two pairs tend to move in the same direction at the same time.

• EUR/USD and GBP/USD - Both have USD as the quote currency, so when the Dollar weakens, both pairs tend to rise
• AUD/USD and NZD/USD - Both are commodity currencies from the same region

Negative (Inverse) Correlation

When two pairs tend to move in opposite directions.

• EUR/USD and USD/CHF - When EUR/USD rises, USD/CHF tends to fall, and vice versa
• GBP/USD and USD/JPY - Often show inverse correlation

Why Correlations Matter

1. Avoid doubling your risk: If you go long on both EUR/USD and GBP/USD, you essentially have double the exposure to USD weakness. If the Dollar strengthens, both trades lose
2. Hedging opportunities: Negatively correlated pairs can be used to hedge positions
3. Confirmation signals: If EUR/USD is breaking out higher but GBP/USD is not, the EUR/USD breakout may be less reliable

Important: Correlations are not fixed. They change over time based on economic conditions. Always check current correlation data rather than relying on historical assumptions.

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Bid, Ask, and the Spread

When you look at a currency pair quote, you will see two prices:

Bid and Ask

• Bid Price - The price at which you can sell the base currency (the lower price)
• Ask Price - The price at which you can buy the base currency (the higher price)

EUR/USD
Bid: 1.0848 | Ask: 1.0850

The Spread

The spread is the difference between the Ask and Bid price. It represents the broker's primary cost to you for executing the trade.

Spread = Ask - Bid = 1.0850 - 1.0848 = 0.0002 = 2 pips

Typical Spreads by Pair Category

| Category | Typical Spread | Example |
|---|---|---|
| Major Pairs | 0.1 - 2 pips | EUR/USD: 0.1-1.5 pips |
| Cross Pairs | 2 - 5 pips | EUR/GBP: 1.5-3 pips |
| Exotic Pairs | 5 - 50+ pips | USD/TRY: 10-50 pips |

Key Insight: Spreads are not fixed. They widen during low-liquidity periods (such as the Asian session for EUR/USD) and during high-impact news events. Always be aware of current spread conditions before entering a trade.

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Which Pairs Should Beginners Trade?

Recommended Starting Pairs

1. EUR/USD - The most liquid pair with the tightest spreads. Abundant learning resources and relatively predictable behavior
2. USD/JPY - Good liquidity and clear trends. Active during the Asian session
3. GBP/USD - More volatile than EUR/USD, offering larger profit potential but also larger risk

Pairs to Avoid Initially

• GBP/JPY - Extremely volatile. Can move 200+ pips in a single day
• Exotic pairs - Wide spreads eat into profits. Unpredictable moves
• Multiple pairs simultaneously - Focus on mastering one or two pairs before expanding

Tips for Pair Selection

1. Start with one pair. Learn its personality, typical ranges, and what drives it
2. Match the pair to your schedule. If you trade during the Asian session, USD/JPY may suit you better than EUR/USD
3. Consider your risk tolerance. Higher-volatility pairs like GBP/USD offer bigger moves but require wider stop losses
4. Check the spread. Always ensure the spread is acceptable before opening a position

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The Role of the US Dollar

The US Dollar (USD) is the most important currency in the Forex market for several reasons:

1. Global Reserve Currency - Central banks around the world hold approximately 59% of their foreign exchange reserves in USD
2. Commodity Pricing - Most commodities (oil, gold, agricultural products) are priced in USD
3. Global Trade - A large percentage of international trade is denominated in USD
4. Safe Haven - During periods of global uncertainty, investors tend to flock to USD

Because of this dominance, major economic events from the United States (such as Federal Reserve decisions, employment reports, and inflation data) tend to move all currency pairs, not just those containing USD.

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Key Takeaways

• Currencies are always traded in pairs consisting of a base currency and a quote currency
• Major pairs (containing USD) offer the best conditions for trading: tight spreads, high liquidity
• Cross pairs exclude the USD and can offer good trading opportunities with moderate spreads
• Exotic pairs have wide spreads and high volatility, making them unsuitable for beginners
• Currency correlations are important for managing risk and avoiding over-exposure
• The spread is your primary trading cost, and it varies by pair, session, and market conditions
• Beginners should focus on one or two major pairs before expanding to others

Next Lesson: In the next lesson, we will learn about Pips, Lots, Spread, and Leverage - the essential building blocks for understanding trade sizing and profit calculation.