It is very possible that you have asked yourself questions such as: why do currencies trade in pairs? What are the most profitable pairs? And the most volatile? I will explain everything you need to know about how currency pairs work in the Forex market in this article.
As you already know, the foreign exchange market (Forex) is the most liquid and ancient that exists. It is one of the markets preferred by professional traders, given its trading conditions (low spreads due to its high liquidity), the possibility of operating 24 hours a day, ease of analysis of price movements (it is a market very technical) and another series of characteristics that make it unique. However, to be successful in trading, it is necessary to know how your assets work, that is, the currency pairs that are traded in this great market.
1. What is a currency pair in Forex
When buying a good or a service, its valuation is based on a monetary amount, corresponding to the local currency. For example, if we intend to buy a property in Spain, it will cost us X amount of “euros”. In case of buying it in the United States, it will cost us a sum of “dollars” (your local currency); Although we can negotiate the payment in a different currency, always, for the money to be effective, it must be changed to the local currency and be able to exchange it for other goods or services.
The same thing happens with financial assets, if we buy shares on the Madrid Stock Exchange, they will be valued in euros; and its quote will be marked in this currency. When we access the New York Stock Exchange, the price of the shares is expressed in United States dollars and they will be bought for an amount of this currency.
Thus, currency acts as a unit of value. But how is a currency then valued?
To resolve this issue, it is necessary to face it with a different currency. In this way, we can say that one “euro” is equal to so many “United States dollars”, so many “Swiss francs”, so many “sterling pounds”, etc. For this reason, currencies cannot trade alone, they need to be grouped into pairs to establish their price.
That is precisely the price of a currency: the quantity of another currency; the corresponding change. The market determines the exchange rate between one currency and another.
Responding to the question that gives the title to this section, a currency pair is nothing more than a exchange rate between two currencies. The way to establish the prices of currencies in the Forex market.
Let’s give an example of how currencies are grouped by pairs, one United States dollar (USD) is equivalent to 1.3194 Canadian dollars (CAD), as marked by the currency market at this time. It is expressed as follows: USD/CAD = 1.3194.
We could translate it as follows: one unit of the first currency of the pair, called the base currency, is equivalent to 1.3194 units of the second currency, called the quote or counter currency. The number of exchange units is set by the Forex market.
Another example: EUR/USD = 1.1010. One euro is exchanged for 1.1010 United States dollars.
2. What are the most common currency pairs
Once we have understood that the currencies must be grouped in pairs, in order to establish their price in the Forex market (the change between one and the other), as we can imagine, there are as many pairs as there are crosses of the existing currencies. However, there are some pairs that stand out for their liquidity, those with the most participants in the market.
They are usually the currencies of the most developed economies, which attract the greatest volume of operations for commercial reasons. Also, due to the historical tradition of the Forex market (such as the pound sterling (or British pound), the currency of the country that was once the center of transactions and continues to be the main place for currency trading).
The most common currency pairs are the following:
- EUR/USD (euro versus United States dollar)
- GBP/USD (British pound versus United States dollar)
- USD/JPY (United States dollar versus Japanese yen)
- USD/CHF (United States dollar versus Swiss franc)
These pairs are called “majors” and have the characteristic that they establish a cross between the four main currencies (EUR, GBP, CHF and JPY) with the United States dollar (USD).
The US dollar is considered the reference currency, the “queen currency”, for historical reasons (formerly, all currencies traded against the US dollar and this, in turn, against gold. This is how the exchange rates were established. change). For this reason, the USD is involved in all major pairs.
There are other pairs that are usually very popular, despite not being considered major pairs. They are crosses of the main currencies seen, this time ignoring the US dollar. In particular, the EUR/JPY, EUR/GBP, EUR/CHF and GBP/JPY pairs are also very common among professional traders.
We could add the Australian dollar (AUD), the Canadian dollar (CAD) and the New Zealand dollar (NZD) as major currencies. Crossing all these currencies, we get a large number of very liquid pairs in which we can find trading opportunities.
3. Most Profitable Forex Currency Pairs
Each of the currency pairs that make up the Forex market has its own characteristics and personality. Some of them are profitable because they present more sustained trends, others, however, are more volatile in the short term. Usually, The majors are considered the most operable, due to their liquidity and stability.
With the most profitable currency pairs we do not refer to those that can reach greater fluctuations in short-term trading (higher volatility). Although it is true that this factor directly affects the profitability of one or a few operations, however, in this case we are referring to a sustained profitability in the medium term, with which it will be necessary to operate with the most liquid currency pairs and stable, those that intervene the main currencies.
Depending on market conditions, one currency pair may be more profitable than another. For example, before a monetary policy decision by the United States Federal Reserve, all the crosses in which the USD intervenes will have greater volatility and probable profitability. However, this volatility will not last over time.
The characteristics of those that are considered the best pairs to trade are the following:
- EUR/USD: this is the currency pair with the highest volume of operations in the entire market, it has the highest liquidity, the lowest volatility and the lowest spreads. It is one of the most profitable currency pairs, because the two most important currencies in the world are involved, with a solid economy behind it. Its movements are more predictable (which provides greater profitability).
- GBP/USD: it is the oldest pair and one of the most prestigious in the market. It presents greater volatility compared to the previous one, offering greater short-term opportunities, but it is also a pair that has great liquidity.
- USD/JPY: it is one of the pairs that offers the greatest long-term trends. Without renouncing the liquidity and stability of the prices.
- EUR/GBP: it is one of the most traded pairs in the market. Crosses with the euro always have great liquidity. To this we must add the good trading conditions offered by the pound sterling in the short term.
- AUD/USD: The Australian dollar has a strong correlation with gold and commodities in general, so its movements are consistent. It also has the necessary liquidity to trade. It is one of the most trending currency pairs on the market.
4. What is the most volatile currency pair
If we do not take into account the exotic currencies, those that are excluded from the most common, have little liquidity and that intersect with the United States dollar (the reference currency), historically, the most volatile pair in the Forex market is the cross of the pound sterling against the Japanese yen (GBP/JPY)
Nicknamed the Widow-Maker, this pair can turn around at any time.
The GBP/JPY has wide volatility due to the existing correlation between GBP/USD and USD/JPY.
It is a highly unstable pair, it tends to have unpredictable movements and increase in volatility unexpectedly. It is one of the most loved and feared pairs in the market at the same time: it offers very good trading opportunities, but it is necessary to operate it with some mastery. GBP/JPY is a difficult asset to tame, and yet it can be very profitable.
5. Currency pairs that move the most pips
In this regard, it is necessary to keep in mind that currency pairs behave differently depending on the time of day. For example, operating on the european sessionthe pairs with the highest volatility are the following:
These currency pairs can reach a mid-range of 100 pips. They would be the most profitable and riskiest pairs within this time frame.
However, if we look at the recent annual volatilitiesit can be deduced that certain crosses of the pound sterling make up the pairs that fluctuate the greatest number of pips:
5. When you can trade currency pairs on Forex
The Forex market is not a centralized market, it does not have a single place for currency trading. This characteristic makes it a market that remains open 24 hours a day, Monday through Friday.
When it is still early in the morning in Spain, Sydney opens and the negotiation begins. Subsequently, Tokyo, Singapore, Hong Kong and all the main Asian centers open their doors.
Before it closes, the opening of the European markets takes place, with Frankfurt leading the way (London, the world’s largest currency center, opens an hour later). Finally, New York and the other American centers have their opening when the afternoon begins in Europe. Before closing America, the Asian session begins again and starts again.
Thus, whether in the Asian, European or American session, any trader can access the Forex market, except on weekends.
In any case, as we have seen in the previous point, in each session there is a certain predilection for certain currencies, so the fluctuation of the pairs usually varies from one to another.
In the Asian session, Tokyo sets the pace and the pairs that show the most movement are USD/JPY and GBP/JPY. During the American session GBP/USD and USD/CHF tend to be more traded (GBP/JPY also has strong activity).
The EUR/USD is a pair that is usually more active in the European and American sessions, both overlap when in Europe it occurs in the afternoon (begins at 13:00 GMT).
And so far everything about currency pairs, something basic and what you need to know about the forex market. Did you know some of these peculiarities and curiosities? Anything you would add? 🙂
A hug and thanks for reading!