What is a currency pair in Forex?

A currency pair in Forex displays the value of one currency relative to another. Traders will always  buy one currency while selling another at the same time, which is why they have to be stated together (currency pair) rather than separately (individual currency). Consider exchanging currency at the airport. When you exchange Euros for US Dollars, you are effectively trading one currency against another. This is analogous to Forex trading, except it takes place globally through online markets. This paired structure enables traders to profit from exchange rate movements. If the first currency grows stronger than the second, the pair will rise. If it weakens, the two currencies will start to fall. Each price movement reflects the state of balance between the two economies.

When trading Forex, you are not simply buying and selling a single currency, but rather, you are comparing one currency to another. This comparison is the very heart of every trade you make. Understanding this early on will help you build clarity early on, make better decisions, and protect your capital. In this article, we’ll walk you through it step by step, without using jargon or applying pressure.  At the end of this guide, you will fully understand what a currency pair is, how it works, and how to identify the best currency pairs to trade given your trading style.

How Currency Pairs Work in the Forex Market

In the Forex market, traders will be entering into a transaction with two different currencies. The first currency is considered the “base” and the second is the “quote”. The base is the currency you are purchasing/selling, and the quote is how much it costs to buy/sell one unit of the base. For example, suppose you think the Euro (EUR) will increase in value against the United States dollar (USD), so you would buy EUR/USD. Conversely, if you think the EUR would decrease in value against the USD, then you would sell EUR/USD.

As new information is released throughout the week, traders react to an increasing or decreasing supply of a particular currency against others, which causes an immediate price adjustment. Forex markets operate 24 hours a day, which means that prices are constantly fluctuating based on news and economic data releases or the sentiment of forex traders. Additionally, prices can move quickly depending on market conditions. Modern brokers, including Otet Markets, provide access to these markets through advanced trading platforms that make placing and managing trades much easier than in the past.

How to Read a Forex Currency Pair

Once you know what each part of a quote means, then reading a Forex quote is simple. A common Forex quote looks like this: EUR/USD 1.1050. The number indicates how much of USD (the quoted currency) is required to purchase one unit of EUR (the base currency). Each Forex pair will always contain the base currency first and the quote currency second. If the price rises, the base currency is gaining strength. If it falls, the base currency is losing strength.
In addition, you’ll often see two prices: bid and ask. The bid is the price you can sell at, and the ask is the price you can buy at. The difference between them is called the spread, which represents trading costs. Looking at Currency pairs examples on historical charts can help beginners understand how prices move under different market conditions. After you become familiar with the quotes, reading them will become second nature. With platforms like the MetaTrader platform, which is one of the most widely used trading platforms in Forex and shows charts and prices live as they happen, you will find it very easy to read forex quotes.

Types of Currency Pairs in Forex

The currency pairs used in foreign exchange (forex) trading are grouped according to their liquidity and popularity. Knowledge of these categories will help you select currency pairs appropriate for your level of experience and risk tolerance. The following table provides a summary of how these categories are defined and categorized, making understanding forex pair groupings easier.

This classification helps traders manage risk and expectations more effectively.

Major Currency Pairs: The Most Traded in Forex

In the Forex market, major currency pairs represent the most actively traded with high liquidity assets due to their popularity. Per their name, all major currency pairs include the United States dollar and one of the major global currencies, such as the Euro or Japanese Yen. The aforementioned benefits allow for a greater level of participation and predictability from the trader’s perspective. Since there is a larger number of participants in the market, technical analysis tends to work much more effectively on major pair trading than on other currencies. Additionally, news and economic data tend to have a stronger impact on major currencies, allowing traders to stay apprised of the latest fundamental developments. For many traders, majors are the starting point before exploring other pair types.

Minor and Cross-Currency Pairs Explained

Minor pairs or cross pairs are the currencies with high liquidity, excluding USD. They include combinations such as the euro versus the pound, yen, or Australian dollar. Spreads on these pairs tend to be slightly wider, and they have lower liquidity than major pairs. However, they do provide unique trading opportunities when used during regional economic events. Minor pair trading is best suited for traders who are already comfortable with market behaviour.

Exotic Currency Pairs and Their Characteristics

The exotic pairs create combinations of one of the major currencies with one from either an emerging market or a smaller economy. Because these pairs do not have a large amount of liquidity available, they often exhibit extreme volatility and unpredictability in pricing. The wider spreads result in higher transaction costs for the trader. Traders are at greater risk when trading exotic pairs due to the sudden price changes usually related to world events (e.g., political instability, economic crises). Therefore, while they may have strong profit potential, exotic pairs require extensive risk management because of the inherent risks when trading these types of pairs. For this reason, many traders do not engage in trading exotic pairs as frequently as they do with major pairs.

How Forex Quotes Are Priced

In the global Forex marketplace, currency values are determined by the interaction between buyers and sellers – supply and demand. When demand is greater than supply for a particular currency (i.e., more traders want to buy than sell), the price of that currency increases. Alternatively, when selling pressure is greater than buying pressure, the price decreases. Forex prices fluctuate due to many types of participant activity: Large financial institutions (banks), hedge funds, and retail traders all contribute to price movement on the Forex market.
Typically, large institutions generate more significant patterns than smaller ones, but smaller traders create many of the small price fluctuations that happen on a daily basis. Technology helps facilitate Forex price movements, as quotes are updated every millisecond and can be accessed by traders all around the world via multiple trading platforms used by Forex traders worldwide. This fast-paced, transparent, and accessible pricing system simulates the activity in the Forex market effectively.

Factors That Influence Currency Pair Prices

Currency exchange rates fluctuate due to a variety of factors, not just because of speculation. All currencies are affected by many of the same things. Examples of such factors include economic conditions (Interest Rates, Inflation data, Employment Reports, and GDP Data), among others. Another factor that influences the currency market is Political Stability. Political events such as elections, policy changes, and geopolitical situations can result in high volatility and sudden price movements in the market.
Additionally, traders are affected by “market sentiment.” Even when there is no real or confirmed data, the market will react to traders’ expectations, which is why traders typically buy/sell on the basis of their own expectations instead of verifiable data. By understanding these various elements, traders can determine what factors may influence their chosen currency(s) and prepare to trade accordingly, thereby reducing the likelihood of reacting emotionally to sudden price changes or volatility.

How to Choose Which Currency Pairs to Trade

There are many different currency pairs available for trading, but choosing the right currency pairs for your trading activities depends on how much experience you have gained so far as a trader, what your trading strategy is, and when you will be available to trade. For instance, new traders often see the greatest gains using currency pairs that are considered to be major because they tend to be more stable and have less volatility than others.
When you first start learning about currency trading, it is extremely important to consider when you trade, because some currency pairs will be more active than others during a certain market session, like London, New York, etc. Additionally, new traders should always avoid trading too many currency pairs simultaneously. Having a narrower focus will allow newer traders to identify patterns in their behaviour and make better trading decisions.
Furthermore, there are numerous demo account options on many of the major trading platforms that will allow new traders to experiment with different currency pairs before deciding which ones are suitable for them.

Read More: Best Brokers for Demo Accounts

Common Mistakes When Trading Currency Pairs

Trading on unfamiliar currency pairs that exhibit dramatic price movement is a common mistake in forex trading. Price volatility may appear attractive to new traders, but it will almost always result in poor trading decisions. Many forex traders also overlook the importance of economic news and events on the market.
A forex trader, regardless of their trading strategy (fundamental or technical), should be aware of when a major economic announcement is scheduled and be prepared for any potential effects on the market. Jumping between pairs and overtrading without a plan leads to loss, so be careful not to overtrade. Instead of chasing quick profits, focus on building a successful trading career.

Read More: How to Avoid Overtrading in Forex

Successful traders always focus on developing and maintaining consistency and discipline in their trading habits while continuing to improve their knowledge base as they grow in experience.

Conclusion

Understanding how currency pairs work is one of the most important steps in Forex trading. Once you learn to read the correlation between pairs, you can read price charts and develop techniques based on the observed correlation. Many Forex traders use a risk management strategy in order to manage risk more effectively and protect their trading capital while attempting to trade for profit. Trading with clarity about the correlation between the two currency pairs can lead to better trading outcomes, whether trading one or multiple pairs. It is essential that you take your time and practice regularly so that you have gained enough experience before attempting to trade on the market, which will always be there; the amount of preparation you put into preparing yourself will be a reflection of your ability to perform successfully in this arena. Forex trading can not only be possible with the right mindset and tools, but can also be profitable.