The Basic Terms
One of the main advantages of Forex to that of other financial markets is that it’s traded in currency pairs. Unlike in the stock market, where each stock represents independent value, in Forex, we always trade currency vs currency.
Currency pairs are built from two independent currencies, where each belongs to a nation.
For example, in the currency pair EUR/USD – there are two currencies involved. The EUR which represent the Eurozone, and the USD which is the US Dollar. The first currency is called the base currency. The second one – quote currency.
The base currency is also known as a transaction currency. It represents how much of the quote currency is needed in order to get one unit of the base currency. So, for example, if EURUSD stands for 1.1800, that means that 1 EUR equals 1.18 USD.
Forex pairs are divided into categories. Majors, Minors and Exotic pairs.
The major pairs are the most liquid and usually that of the G7 countries and that’s where the majority of transactions in Forex happen. Due to this fact, the spread on the Major pairs will be the lowest while on exotic pairs, on markets like the Turkish Lira, spreads will be higher.
In most Major pairs you will find the US Dollar as a base currency or the quote currency. The reason for that, of course, is the fact that about 80% of the transactions around the globe, involve the Dollar
The abbreviations used in forex currencies are prescribed by the International Organization for Standardization also known as ISO. Currency pairs use these codes made of three letters to represent a particular currency. This then forms there ticker (market) symbol.
Forex Major Pairs
Here is a list of Forex major currencies and their pairs –
EURUSD – Euro vs. US Dollar
USDJPY – US Dollar vs. Japanese Yen
GBPUSD – British Pound vs. US Dollar
USDCHF – US Dollar vs. Swiss Franc
USDCAD – US Dollar vs. Canadian Dollar
AUDUSD – Australian Dollar vs. US Dollar
NZDUSD – New Zealand Dollar vs. US Dollar
Fores Minor Pairs
Here is the list of minor pairs (Pairs that don’t include US Dollar in them, also called crosses /cross currency pairs) –
EURGBP, EURJPY, EURCAD, EURAUD, EURCHF, EURNZD
GBPJPY, GBPAUD, GBPNZD, GBPCHF, GBPCAD
AUDCAD, AUDCHF, AUDNZD, AUDJPY
NZDCAD, NZDCHF, NZDJPY
In the exotic currencies list, you can find currencies like the TRY (Turkish Lira), HKD (Hong Kong Dollar), NOK (Norwegian Krone), SGD (Singapore Dollar) and ZAR (South African Rand).
If a major currency is paired together with any of the exotic currencies, this will create an exotic currency pair. For example, EURTRY, GBPRUB, MXNJPY – will all belong to a list of exotic pairs.
Some of the forex currencies have their nicknames, here are the most common ones:
USD (US Dollar) – Greenback or Buck
GBP (British Pound) – Sterling
EUR (Euro) – Fiber
CHF (Swiss Franc) – Swissy
CAD (Canadian Dollar) – Loonie
AUD (Australian Dollar) – Aussie or Ozzie
NZD (New Zealand Dollar) – Kiwi (the bird, not the fruit 😊 )
The major currency pairs / crosses also have their nicks, and here are the most popular ones –
EUR/GBP (Euro/ British Pound) – Chunnel
EUR/JPY (Euro/ Japanese Yen) – Euppy
EUR/USD (Euro/ U.S Dollar) – Fiber
GBP/USD (British Pound/ U.S Dollar) – Cable
GBP/JPY (British Pound) – Gopher or Guppy
USD/JPY (U.S Dollar/ Japanese Yen) – Ninja
USD/RUB (U.S Dollar/ Russian Ruble) – Barnie
EUR/RUB (Euro / Russian Ruble) – Betty
EUR/BTC (EURO/Bitcoin) – Nakamoto
What makes the Currency Pair change in price?
Like any other financial asset, currencies and currency pairs also depend on the demand for it and the supply of it.
A high demand for a currency or a shortage in its supply will cause an increase in the price and will affect the exchange rate versus the other currencies.
A currency’s supply and demand are tied to a number of factors such as the country’s monetary policy, the rate of inflation, and political and economic conditions.
This data changes frequently with the change of the economical conditions of a nation and affect directly on the demand for the currency.
The supply of a currency is determined by the domestic demand for imports from abroad. When the price of a foreign currency rises, domestic goods become relatively cheaper. It induces the foreign countries to increase their imports from the domestic country.
As a result, supply of foreign currency rises.
Demand for a currency has the opposite effect on the value of a currency than does supply. As the demand for a currency increases, the currency becomes more valuable. Conversely, as the demand for a currency decreases, the currency becomes less valuable.
The Numbers Behind The Currency Pairs
In every financial market there are more popular assets and instruments, and less common ones. This applies to Forex market as well.
As a rule of thumb, the more tradable a currency pair is and the more popular it is, the lower the costs to trade it. The logic here is simple – the more liquid a pair is, the lower the costs it has for traders.
Here, you can find the numbers behind the pairs:
- EURUSD – Euro vs. US Dollar – More than 20% of the world’s transactions are done on this currency pair! While the numbers vary, EURUSD is always the most popularly traded currency pair in Forex Market.
- USDJPY – US Dollar vs. Japanese Yen is the 2nd most popular currency pair among the forex traders with an average of 13-14% from the total Forex transactions.
Many traders believe that the first two currency pairs, are the most technical ones and the most profitable ones for retail trading.
- AUDUSD – Australian Dollar vs US Dollar catches the 3rd place of the most liquid and common forex currency pairs.
The next on the list can vary in periods, and they include currency pairs like GBPUSD, USDCAD, NZDUSD, GBPJPY, EURJPY, EURGBP, AUDJPY.
USDCHF, despite being one of the major currency pairs, normally doesn’t belong to the most popular or liquid forex currencies pairs.
Most experienced and professional traders prefer to trade the most liquid forex pairs, while a lot of new traders try their luck on the less popular ones. While professional traders prefer to trader liquid, stable and technical pairs, new traders prefer the ones that make “bigger moves” and change in price even though they’ll have to pay much bigger commissions for that.
The reasons why traders prefer to trade the most liquid pairs are: