How to Read Currency Pairs in Forex Trading: A Comprehensive Guide for 2023

The Forex market is the largest financial market in the world, and currency pairs are the most common way to trade in it. Many people are interested in learning how to trade currencies, but they are not sure where they should start and are often filled with queries like “What are currency pairs,” “How to read currency pairs,” or “How do currency pairs work in Forex.” If you are perplexed with any of these queries, you need not worry, as we will help you understand the basics of the forex market. We will explain in depth how to read currency pairs and different types of currency pairs traded in Forex.

So without much ado, let’s dive deep and learn more about “How to read currency pairs,” but before that, let’s take a quick sneak peek at the currencies traded in Forex.

Which currencies can I trade in Forex trading?

Following are some of the currencies exchanged in the Forex market

1. US Dollar (USD)
2. Japanese Yen (JPY)
3. Euro (EUR)
4. British Pound Sterling (GBP)
5. Australian Dollar (AUD)
6. New Zealand Dollar (NZD)
7. Canadian Dollar (CAD)
8. Swiss Franc (CHF)
9. Chinese Yuan (CNY)
10. Swedish Krona (SEK)
11. Mexican Peso (MXN)
12. Chinese renminbi (CNH)

What is a Forex Quote?

Forex quotes measure the value of a currency in relation to the other currency in the currency pair. They are available in real-time, so they can be used to get live information about the markets and trends, and they are also important to traders who use them to calculate profit and loss during trading sessions.

Once we have learned about different currencies used in Forex, let’s address the elephant in the room, how to read currency pairs.

How do Currency Pairs work?

The foreign exchange market is the world’s largest financial market, and currency pairs are used for trading in it. The price of a currency pair will vary as the price of either of the currencies in the pair can fluctuate. Currency exchange rates fluctuate due to many factors, including the country’s economic situation and the value of goods and services. The value of a currency can also vary depending on how much confidence people have in it and how much demand there is for each currency. Thus, as the currency’s price fluctuates, one currency in the pair will always be stronger than the other.

How to Read Currency Pairs?

First, you should understand that the currencies are written as their ISO codes, meaning each currency is denoted by three capital letters. For instance, Euro will be written as EUR, while US Dollar will be written as USD. 

Moreover, to read the currency pairs correctly, one must know the difference between the first and second currencies. Base Currency is the first currency; you can buy or sell it, while quote currency or counter currency is what you will be trading against. The quote currency is used as a benchmark or reference rate. For example, if you are going to buy USD/JPY, then USD would be your base currency, and JPY would be your quote currency.

It is worth mentioning that the difference between the value of both currencies in the currency pair is termed the ratio price.

Now, let’s understand this whole concept with an example. For instance, a trader wants to do a trade using the currency pair EUR/USD and has seen a currency pair listing as 1.0867; here, the Euro is the base currency, while the US Dollar is the quote currency. This 1.0867 is the difference between the values of these currencies, hence the ratio price.

So this currency exchange listing shows that one Euro is equivalent to 1.0867 US Dollars, making the Euro the stronger currency of the pair. Now, what the trader would want to do in this scenario is go with the trend, and he will buy the Euro against the Dollar, meaning that he will hold a long position for the Euro while short the US dollar.

Once the trader has taken the position, he will gain profit as long as the Euro remains the stronger currency in the pair. Thus for the trader to gain profit, the rate of the Euro should increase.

On the other hand, keeping the above currency exchange rate into consideration, if the trader wants to go against the trend and thinks that the price of the US Dollar will rise more than the Euro in the future, they will hold a short position for the EUR/USD currency pair.

What are Ask, Bid, and Spread in Forex?

In Forex trading, the bid and ask are seen from the broker’s perspective; it means that if being a trader, you want to buy a currency pair, the broker will “ask” the price (which means that you have to pay this amount to the broker to buy the currency pair).

In contrast, if you are the one selling the currency pair, then the forex broker will “bid” a price to buy it (which means that you will get this amount when you sell the currency pair), and you should always remember that the ask is larger in amount as compared to that of the bid.

Thus, for understanding purposes, you can say that from the trader’s perspective, bid means an offer or a price for a currency pair at which he wants to sell it, while ask is the minimum price at which he is willing to buy a currency pair. 

When a trader places an order on the Forex market, he buys or sells a currency pair, and the spread is the difference between a particular currency pair’s bid and the ask price. This term describes how much of a particular currency a trader wants to buy or sell at a specific price.

Let’s take an example to understand it in a better way. For instance, in the Euro-dollar currency pair, the bid and the ask seem like

EUR/USD = 1.0616/1.0617

In this, 1.0616 is the “bid” while 1.0617 is the “ask,” and the difference between the two, 0.0001 or 1 pips, is the “spread.”

What is PIP in Forex Trading?

Pip is the abbreviation for percentage in point or price interest point. The pip is the smallest unit of forex trade and is equivalent to one percentage point or 0.0001 of a point. The pip value can be used as an indicator to help determine the difference between the worth of different currencies. Thus, in the above example.

EUR/USD = 1.0616/1.0617

As the difference between the bid and the ask is 0.0001, the spread is equal to 1 pip.

If you are new to this financial market, you can read how long it takes to learn Forex trading here.

Different types of Currency Pairs in Forex Trading

Beginners need to understand how the markets work and what currencies are traded on them. The first thing traders need to do is decide which currency they want to trade in. Currency pairs are one of the most important components of forex trading. 

When traders enter into a currency pair trade, they bet on the relative strength or weakness of two currencies. In a forex transaction, one currency is bought, and another is sold simultaneously; however, it is simple to think of a currency pair as a single unit that can be bought or sold. The traded currency pair determines which two currencies are exchanged and how much profit can be made from the transaction. Traders must carefully analyze the currency pairs before deciding which one to invest in, as each has its risks and rewards.

Following are the three main categories of currency pairs used in Forex:

1. Majors
2. Crosses
3. Exotics

Majors

Around 60% of all central bank’s foreign exchange reserves are held in the US dollar, making it evident why it is widely regarded as the most popular currency worldwide. The majors comprise US dollars as a mandatory member of the currency pair, and the following are the major currency pairs in Forex.

1. EUR/USD (Euro is set against the US Dollar in this euro-dollar pair)
2. USD/JPY (US Dollar is set against the Japanese Yen in this dollar-yen pair)
3. GBP/USD (British Pound Sterling is set against the US Dollar in this pound-dollar pair)
4. USD/CHF (US Dollar is set against the Swiss Franc in this dollar-swissy pair)
5. USD/CAD (US Dollar is set against the Canadian Dollar in this dollar-loonie pair)
6. AUD/USD (Australian Dollar is set against the US Dollar in this aussie dollar pair)
7. NZD/USD (New Zealand Dollar is set against the US Dollar in this kiwi dollar pair)

Crosses

Cross-currency pairs, also referred to as crosses or minor currency pairs, are any two significant currency pairs that do not include the US dollar. Traders can use them to diversify their portfolios, as they offer exposure to different markets without having to invest in a single major currency. Additionally, these pairs can be used as a hedge against market volatility and help traders manage their risk more effectively.

Euro crosses

1. EUR/CAD (Euro is set against the Canadian Dollar in this euro-loonie pair)
2. EUR/AUD (Euro is set against the Australian Dollar in this euro-aussie pair)
3. EUR/CHF (Euro is set against the Swiss Franc in this euro-swissy pair)
4. EUR/GBP (Euro is set against the British Pound Sterling in this euro-pound pair)
5. EUR/NZD (Euro is set against the New Zealand Dollar in this euro-kiwi pair)
6. EUR/SEK (Euro is set against the Swedish Krona in this euro-stockie pair)
7. EUR/NOK (Euro is set against the Norwegian Krone  in this euro-nockie pair)

Pound crosses

1. GBP/CAD (British Pound Sterling is set against the Canadian Dollar in pound-loonie pair)
2. GBP/CHF (British Pound Sterling is set against the Swiss Franc in pound-swissy pair)
3. GBP/NZD (British Pound Sterling is set against the New Zealand Dollar in pound-kiwi pair)
4. GBP/AUD (British Pound Sterling is set against the Australian Dollar in euro-aussie pair)

Yen crosses

1. AUD/JPY (Australian Dollar is set against the Japanese Yen in this aussie-yen pair)
2. EUR/JPY (Euro is set against the Japanese Yen in this euro-yen pair)
3. CHF/JPY (Swiss Franc is set against the Japanese Yen in this swissy-yen pair)
4. CAD/JPY (Canadian Dollar is set against the Japanese Yen in this loonie-yen pair)
5. NZD/JPY (New Zealand Dollar is set against the Japanese Yen in this kiwi-yen pair)
6. GBP/JPY (British Pound Sterling is set against the Japanese Yen in this pound-yen pair)

Others

1. CAD/CHF (Canadian Dollar is set against the Swiss Franc in this loonie-swissy pair)
2. NZD/CAD (New Zealand Dollar is set against the Canadian Dollar in this kiwi-loonie pair)
3. AUD/CHF (Australian Dollar is set against the Swiss Franc in this aussie-swissy pair)
4. AUD/NZD (Australian Dollar is set against the New Zealand Dollar in this aussie-kiwi pair)
5. AUD/CAD (Australian Dollar is set against the Canadian Dollar in this aussie-loonie pair)
6. NZD/CHF (New Zealand Dollar is set against the Swiss Franc in this kiwi-swissy pair)

Exotics

A major and exotic currency are combined to form an exotic currency pair. It is worth mentioning that exotic currency refers to the currency from countries with developing financial markets.

Some of the popular exotics are

1. USD/TRY (US Dollar is set against the Turkish Lira in this dollar-lira pair)
2. USD/SGD (US Dollar is set against the Singapore Dollar in this dollar-sing pair)
3. EUR/TRY (Euro is set against the Turkish Lira in this euro-lira pair)
4. USD/ZAR (US Dollar is set against the South African Rand in this dollar-rand pair)
5. USD/SAR (US Dollar is set against the Saudi Arabian Riyal in this dollar-riyal pair)

The Most Commonly traded Currency Pairs in The Forex

Following are the 18 most commonly traded currency pairs in the Forex Market by volume owing to their liquidity

1. USD/CAD
2. EUR/USD
3. GBP/USD
4. NZD/USD
5. AUD/USD
6. USD/CHF
7. EUR/AUD
8. EUR/CAD
9. AUD/CAD
10. EUR/GBP
11. AUD/NZD
12. AUD/JPY
13. EUR/CHF
14. EUR/JPY
15. CHF/JPY
16. GBP/JPY
17. GBP/CHF
18. USD/JPY

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Why Traders Trade the Major Currency Pairs?

Forex is the market that allows traders to buy or sell currencies, and the major currency pairs are the most traded ones in this market. We can see that traders mostly trade these pairs because they have high volumes and low spreads, which means it’s easier to make money on these pairs than on others.

This inverse relation between spread and volume attracts traders to these pairs as it gives them the power to easily enter or exit any trade. On the other hand, it could be more challenging to sell or buy a large position in comparatively lower volume pairs without substantially changing the price.

How are the Prices of Major Currency Pairs determined?

The prices of major currency pairs are determined by supply and demand, which is influenced by the economic and fundamental conditions of the country, like the GDP, the interest rates, economic activity, inflation rates, etc.

On the one hand, the supply is determined by how much money is circulating in that country. On the other hand, demand is determined by how much people are willing to buy or sell that currency.

For instance, in a country where the economy is doing well, the demand for that currency may be high, and the price could increase. This is because people want to invest in that country’s economy.

On the other hand, if a country has a political situation and the country’s economy is struggling, it can cause a decrease in demand for the currency, causing its value to decrease. 

Thus, when there is a high demand for a currency, its price will go up. When there is a low demand for a currency, its price will decrease.

Conclusion

We have discussed the basics of currency pairs, how to read currency pairs in Forex, and different terminologies that you should be aware of when making a trade. Because understanding the working of currency pairs can help you make better decisions in your trading. We hope that you have understood how to read currency pairs and different currency pairs used in Forex trading.

So if you want a rather safe route, you can stick to trading the major currency pairs owing to their high liquidity. Still, if you are optimistic and brave enough to try something different, you can consider trading in crosses and exotics. No matter which way you opt, consider all the possible rewards and risks associated with it beforehand.

Have a nice day!

References

• A Forex trading expert system based on a new approach to the rule-base evidential reasoning
• Longer time frame concept for foreign exchange trading indicator using matrix correlation technique
• Forex for beginners
• What is forex trading?

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