Trading for Beginners: FAQs on Forex Trading Currency Pairs!

Stepping into the realm of forex trading? Then you’ve come to the right place! In this article, we’ll be tackling one of the most basic and essential topics in forex–currency pairings. This plays a huge role when trading and is something you should definitely know about.

If you’ve been trading for a while now, this is something you already might have an idea about. But if you’re new to trading and forex, it might seem intimidating and even complex but trust us when we tell you, it’ll be digestible! Just take it one step at a time.

So if you’re wondering how to trade forex, start off by knowing how currency pairs work. We compiled a list of frequently asked questions about currency pairings in forex trading. Check them out and get your questions answered! And who knows you might learn a thing or two along the way.

1 – What are currency pairs in forex trading?

Let’s start off with the most basic question of them all, what is a forex currency pair? Basically, a currency pair in forex is a quotation of two different currencies. Of course, since the two pairs carry different values, they’re both quoted against each other. In the foreign exchange market, it represents the relative worth of one currency to another.

2 – How are currency pairs formatted?

Forex currency pairs are ‘formatted’ in three-letter codes. It’s usually the first two letters representing the country or region, then the third letter represents the currency. To give you an example USD–dissected its (United States Dollar) or EUR (The European Union.)

So when you run into a “EUR/USD” this means the Dollar and Euro are paired against one another.

3 – What are the major currency pairs?

In forex trading, around 6 major currency pairs are taking over the market. These pairs are the ones frequently traded in the market and these are:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CHF
  • AUD/USD
  • USD/CAD

4 – What are minor or exotic currency pairs?

Cross-currency pairs are another name for minor currency pairs. They combine two significant currencies but do not contain the US Dollar. Exotic currency pairings include a major and a minor or emerging market currency. To give you an idea of exotic currency pairs, here’s an example:

  • GBP/SGD
  • EUR/MXN
  • GBP/PLN
  • CYN/RUB
  • HKD/INR

5 – What are base and quote currencies in forex trading?

In the foreign exchange market, the idea of currency pairs is based on the basic separation of two currencies: the base currency and the quote currency. The base currency, sometimes referred to as the first currency in the pair, forms the basis for calculating exchange rates. In essence, it serves as the exchange standard against which the value of the quotation currency, or second currency, is determined.

The base currency serves as the foundation for the exchange rate relationship as a whole. The value of the currency you are really buying or selling serves as the basis for comprehending the exchange rate.

 6 – What does the exchange rate of a currency pair mean?

A currency pair’s exchange rate provides information about the relative worth of the two different currencies. It essentially shows in precise numbers how much of the quote currency is needed to buy one unit of the base currency.

For traders and investors, this exchange rate acts as a critical benchmark for decision-making in the fluid and constantly changing environment of the foreign currency market. 

7 – How can I profit from forex trading currency pairs?

First off, knowing how currency pairs work is a great advantage and can help you make better decisions when trading. Forex traders make money by betting on the changes in value of different currency pairings. If they believe the base currency will strengthen, they can purchase (go long) or sell (go short), according to their expectations. 

8 – What is a pip?

The term “pip” is something you’ll bump into a lot when trading in forex. So it’s best to know what this means. First off, PIP stands for Percentage In Point and it means the smallest price movement that a currency can make. That affects a currency’s exchange rate based on the market convention. The final decimal point in the exchange rate serves as the pip.

9 – What affects the prices of currency pairs?

Currency pair prices, or in the much common term “exchange rates”, are impacted by a variety of variables. Variables that reflect the intricate interaction of economic, geopolitical and market dynamics. To give you an idea, here are 5 major factors that affect the exchange rates:

  • Interest rates – Interest rates are determined by central banks. Higher interest rates in a nation sometimes entice foreign capital seeking greater returns. What they do is increase demand for that nation’s currency and perhaps cause it to appreciate.
  • Political stability – Currency value is greatly influenced by political stability and good governance. Governments that are secure and have a low degree of political risk usually have stronger currencies.
  • Economic data – Economic health may be determined by looking at metrics like GDP growth, employment statistics, inflation rates and trade balances. While negative economic data might cause a currency to depreciate, positive economic data can increase its worth.
  • Supply and demand – The rules of supply and demand apply to currencies just like they do to any other asset. A currency’s price will increase if there is a large demand for it, and it will decrease if there is a low demand.
  • Market sentiment – Minor swings in exchange rates can be caused by market sentiment and speculative trading. When traders react to news events, geopolitical developments, and mood swings, prices can fluctuate quickly.  

10 – How do I choose the right currency pair to trade?

When it comes to choosing a currency pair to trade, consider ones that are in line with your trading philosophy, risk profile and market expertise. It’s crucial to conduct in-depth research on and analysis of the pairings you plan to trade. 

Take away

Now you know 10 FAQs on forex currency pairs, you are now better equipped to make more accurate speculations when trading. And don’t forget, forex is one risky trade to get into, so it’s best to be prepared! Plus in any trade you get into, knowledge will always give you the upper hand so never stop learning!

raaaaachoh

raaaaachoh

Writer and market analyst Rachel Marquez has more than 5 years of experience. She specializes in producing beginner-friendly trading techniques, guides, and tips. Also, she recommends FP Markets as the top broker for trading CFDs and forex.

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