Currency pair trading
Currency pair trading is the practice of quoting two different currencies, with the value of one currency being quoted against the other. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. In currency pair trading, traders compare the value of one currency to another—the base currency versus the quote currency. This indicates how much of the quote currency is needed to purchase one unit of the base currency.
Trading currency pairs is conducted in the foreign exchange market, also known as the forex market. It is the largest and most liquid market in the financial world. This market allows for the buying, selling, exchanging, and speculation of currencies. It also enables the conversion of currencies for international trade and investment. The forex market is open 24 hours a day, five days a week (including most holidays), and sees a huge amount of trading volume.
All forex trades involve the simultaneous purchase of one currency and the sale of another, but the currency pair itself can be thought of as a single unit—an instrument that is bought or sold. When you buy a currency pair from a forex broker, you buy the base currency and sell the quote currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. Understanding the dynamics of currency pair trading is crucial for making informed trading decisions and maximizing profit potential.
Top 10 Most Traded Currency Pair trading in Forex
The forex market, renowned for its sheer size and volatility, offers traders a plethora of currency combinations. To streamline the process, here’s a look at the ten most traded forex pairs globally.
1. EUR/USD (Euro/US Dollar)
The EUR/USD pair stands as the most traded, accounting for 24.0% of daily forex trades in 2019. This popularity is rooted in the economic strength of the Eurozone and the United States, the world’s two largest economies. High liquidity and tight spreads make it a favorite among traders.
2. USD/JPY (US Dollar/Japanese Yen)
Known as “the gopher,” USD/JPY is the second most traded pair, comprising 13.2% of daily forex transactions. The yen’s prominence in Asia and the dollar’s global dominance contribute to its high liquidity and trading volume.
3. GBP/USD (British Pound/US Dollar)
Colloquially termed “cable,” GBP/USD represented 9.6% of all daily trades in 2019. The pair’s movement is heavily influenced by the relative economic performance and interest rates of the UK and the US.
4. AUD/USD (Australian Dollar/US Dollar)
The AUD/USD pair, often called “the Aussie,” made up 5.4% of daily trades. The Australian dollar’s value is closely linked to the country’s export commodities, such as iron ore and coal, impacting its forex rates significantly.
5. USD/CAD (US Dollar/Canadian Dollar)
Referred to as “the loonie,” USD/CAD accounted for 4.4% of daily forex transactions. The Canadian dollar’s strength is tied to oil prices, given Canada’s significant oil exports.
6. USD/CNY (US Dollar/Chinese Renminbi)
The USD/CNY pair represented 4.1% of daily trades in 2019. The Chinese government’s control over the yuan and the ongoing US-China trade dynamics make this pair particularly noteworthy.
7. USD/CHF (US Dollar/Swiss Franc)
Known as “the Swissie,” USD/CHF comprises 3.6% of daily forex trades. The Swiss franc is often a safe haven during economic uncertainty, affecting its trading volume based on global stability.
8. USD/HKD (US Dollar/Hong Kong Dollar)
USD/HKD saw a rise in trading volume, making up 3.3% of daily transactions. The unique pegged exchange rate system of the Hong Kong dollar to the US dollar creates trading opportunities within a specific fluctuation band.
9. EUR/GBP (Euro/British Pound)
EUR/GBP transactions accounted for 2.0% of daily trades. The pair’s volatility, especially influenced by Brexit uncertainties, offers opportunities for those adept at managing risk in unpredictable markets.
10. USD/KRW (US Dollar/South Korean Won)
Making its debut in the top ten, USD/KRW represented 1.9% of daily trades. South Korea’s impressive economic growth has heightened interest in the won, reflecting the country’s significant role in the global economy.
Understanding Forex Pairs
Forex pairs are traded in a base/quote format, where the base currency is listed first and the quote currency second. The displayed price indicates how much of the quote currency is needed to buy one unit of the base currency. For instance, in EUR/USD, if the price is 1.2000, one euro is worth 1.20 US dollars.
Categories of Forex Pairs
- Majors: These include the most traded pairs like EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
- Commodity Currencies: Pairs like AUD/USD and USD/CAD, whose values are tied to commodities.
- Cross Currencies: Pairs that do not include the US dollar, such as EUR/GBP and EUR/JPY.
Conclusion
While EUR/USD leads in trading volume, numerous other pairs offer high liquidity and trading opportunities. Traders should conduct thorough technical and fundamental analysis, considering factors like central bank announcements and global trade issues, to make informed trading decisions.