Understanding the trading mechanism in the forex pairs system is one of the challenges that new traders may face, especially if they are stock market traders, it is a bit different.
In our article below, we will shed light on the concept of the parity system in the forex market, along with identifying the most popular and important currency pairs that are traded in the market.
The most famous and strongest global currencies
Before we talk about the concept of currency pairs in Forex, we must get acquainted with the eight most famous global currencies, which are the currencies of major countries, which have economic weight:
- USD - The currency of the United States and is called the peak or peak.
- EUR, which is the currency of the European Union countries and is called Fiber or Fiber
- The pound sterling, which is the currency of the United Kingdom and is called cable or cable
- JPY - Japan's currency - called yen or yen
- The Australian dollar, AUD, is the Australian currency and is called Aussie.
- New Zealand's currency, the New Zealand dollar (NZD), is called the kiwi or kiwi.
- Canada's currency, the Canadian dollar (CAD), is called the Loonie or Loonie.
- Swiss Franc CHF, which is the currency of Switzerland and is called Swissy or Swissy
Concept of currency pairs trading system
Trading in the foreign exchange or forex market is slightly different from trading in the stock market. The trading process involves not one currency but two currencies together. When you buy one currency, you are necessarily a seller of another, in a way similar to an exchange. or barter system.
Imagine that you have some US dollars and you go to an exchange office to exchange the dollar for the corresponding Saudi riyal, remember that the transaction involves two currencies, not one, you sold the dollar to buy the Saudi riyal. The exchange rate of the US dollar against the Saudi riyal and in short what is happening in this foreign exchange market.
Therefore, trading in the forex market is known as a pair trading system wherein two currencies are combined in a pair such that one currency is traded against the other.
The first currency in the currency pairs is called the base currency, and the second is called the counter currency.
In the previous example, the base currency is the US dollar and its symbol is the US dollar, and the counter currency is the Saudi riyal, the Saudi riyal, and the exchange rate is the required amount of the counter currency "Saudi riyal" to purchase one unit. The base currency is the "US dollar", and one dollar equals 3.7509 Saudi riyals for purchase
the most popular currency pairs in forex
Forex currency pairs differ in their trading volume, popularity or degree of difficulty in executing their trades, and liquidity in the markets, but we can say that the most common classification of currency pairs can be divided into 3 classifications:
- Major currency pairs
- Cross currency pairs
- Exotic or exotic currency pairs
Major currency pairs
They are the currency pairs to which the US dollar (USD) is a party, whether it is the base currency or the counter currency, and the other side is the currency of the major industrial countries, which are the countries of the eurozone, Japan, United Kingdom, australia:
- EUR/USD Euro Dollars
- British Pounds / US Dollars
- USD/JPY beat $1
- USD/CHF Franc dollars
- USD/CAD is one US dollar and one Canadian dollar.
- AUD/USD Australian Dollar US Dollar
- NZD/USD New Zealand Dollar US Dollar
He took the lead since the end of World War II and the signing of the Bretton Woods Agreement, whereby exchange rates were indexed in US dollars, and the US dollar was considered the main monetary reserve currency for central banks in various governments and gold. Oil, silver, etc. It is the pricing measure for most commodities, so it can be said that the US dollar is the undisputed master of the world's currencies.
It is worth noting that dealing with major currencies or pairs is considered one of the most important features of Forex for traders, as about 90% of the volume of trading in the foreign exchange market takes place in major currencies (US dollar, British pound, euro). , Japanese Yen, Swiss Franc, Canadian Dollar, Australian Dollar, and New Zealand Dollar) thus following them creates good trading opportunities from them.
Cross currency pairs
Currency pairs to which the US dollar is not a party generally have lower liquidity and trading volumes in cross-currency pairs than in major currency pairs, so you will notice spreads or spreads (described in the next section). Of course) higher than the majors, and cross-currency pairs get the attention and follow of forex speculators due to their strong moves, especially the pairs that contain both sides of the majors.
The most common currency pairs that interest traders in the forex market are:
- EUR/GBP Euro British Pound
- EUR/JPY Euro Yen
- EUR / CHF Euro Franc
- GBP/JPY British Pound Yen
In the previous currency pairs trading volumes table, we see the trading volumes of some cross pairs and how some of them compete with the majors in terms of liquidity and strength.
Why are crossed pairs called by this name?
Since exchange rates are the intersection of exchange rates between major currency pairs, they are called cross pairs in forex, which means that they are equal to the product of the two prices to get the pound-yen exchange rate. Husband. We multiply the GBPUSD exchange rate by the USDJPY exchange rate
odd pairs
In forex, exotic or exotic currency pairs include emerging market currencies. These pairs are not as liquid or large as the financial markets, and the spreads are often much larger. These currency pairs are against the US dollar or major currencies.
- USD/DKK is a US dollar and a Danish krone
- USD/HKD US Dollar Hong Kong Dollar
- EUR / ZAR Euro South African Rand
- GBP / SEK British Pound Sterling Swedish Krona
Note that naming currency pairs in forex in the order of "base currency" for the first currency or "counter currency" for the second currency is standard and never changes.
For example, the Australian dollar pair (AUD/USD) will remain the same as the Australian dollar and we cannot call it (USD/AUD). It is also important to select the base currency from the counter currency in the forex trading mechanism, which we will explain in detail in our next article, highlighting the details of the trading method.
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Forex trading