The foreign exchange (also known as forex or FX) markets can be difficult to comprehend. There is an awful lot to consider, such as how they operate, why some currency pairs are more popular than others, the factors that can affect their values and so much more.
To be a successful forex trader, you need to develop a strong understanding across all of these elements. And if you’re just starting out on your journey, that objective can feel as though it’s well out of reach. That’s why it makes sense to begin with the basics and gradually expand your knowledge. So, with that in mind, here’s a beginner’s guide to currency pairs – the fundamental instrument in forex trading.
What is a currency pair?
This is where the value of one currency is quoted against another. For example, the US Dollar (USD) against the Euro (EUR), which you are likely to see presented as USD/EUR. Written like that, the USD is known as the base currency and the EUR is referred to as the quote currency.
Currency pairs compare the value of the two, so the above example would represent how many Euros you would need to buy one US Dollar.
What are the most frequently traded currency pairs?
Perhaps unsurprisingly, the USD features heavily and is involved in all of the seven most frequently traded currency pairs. According to data from 2020, the EUR/USD pair came out on top, accounting for more than a quarter (27.95%) of all trades. Next on this list was the US Dollar and the Japanese Yen (13.34%) with the USD and the British Pound rounding out the top three at 11.27%.
What can affect the value of currency pairs?
There are a wide range of factors that can influence the status of a currency and therefore its value as one half of a pair. Financial crises, political unrest and the price of raw materials or commodities in exporting countries can all have an impact on their economies and thus the strength of their currency. This in turn can create opportunities for forex traders to buy or sell against another currency accordingly.
When can you trade currency pairs?
If you wish to do so, you can trade the forex markets 24 hours a day through the standard working week. That’s because sessions open at various points across the world from Sydney and Tokyo to London and New York. The time difference across those trading hubs means there is always a market open somewhere, although they do close at the weekend and typically on public holidays like Christmas Day.