What is Forex?

To understand pair trading in forex, it is important to first become familiar with the basic terminology. So, while dealing with a pair of currencies, the first currency is called the base currency, while the second one is known as the quote or counter currency.

When you check for the exchange rate, you will find that it is indicated in terms of how much of the counter currency is required to buy one unit of the base currency. If for example the EUR/USD exchange rate was 1.09705. This means that you will need US$1.09705 to buy €1.00. On the other hand, when you are selling, this same exchange rate tells you how many units of the counter currency you will get when you sell one unit of the base currency.

When trading forex, your broker will list each currency pair, along with their exchange rate, while indicating the “ask” and “bid” price.

The ask price is the rate at which the broker wishes to sell, or in other words, it is the rate that you will need to pay to buy a specific currency pair. On the other hand, the bid price is the amount that the broker is willing to pay to buy the currency pair, or the amount that you will receive if you wish to sell to the market. The important thing to remember here is that the bid price is always lower than the ask price, given that a broker will obviously want to pay less to buy than what they expect to gain when they sell the same currency pair. The difference between the bid and ask price is called the spread. This is usually a very nominal amount, and this is how brokers generate revenue for themselves.

Major Currency Pairs

Currency pairs are categorised based on the volume traded each day for a pair. The “major” pairs are the most commonly traded pairs, and usually trade against the US dollar. These include, the EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CHF, NZD/USD and USD/CAD. These generally have very narrow spreads and very liquid markets, trading 24x7.

Minor and Exotic Forex Pairs

Pairs that do not include the US dollar are known as minor currencies or crosses. These pairs tend to have marginally wider spreads and are usually not as liquid as the major pairs. However, they do see adequately liquid markets and can be profitable to trade in. In addition, one or both the currencies could be a major, such as the GBP/JPY or EUR/GBP.

Exotic pairs, on the other hand, are currencies of the emerging markets, where the spreads tend to be wider, while the pairs are not as liquid. Here’s a look at some of the most common minor pairs.