Currency Pair, Currency Pairs

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Forex trading involves the simultaneous buying of one currency and selling another. The currencies involved in a single trade form a currency pair. The first currency quoted in a currency pair is called the base currency, while the second currency is called the quote currency or the counter currency. When an exchange rate is quoted, it is always expressed as the number of units of the counter currency needed to buy one unit of the base currency.

While there are several currency pairs, the top four currency pairs that account for 70% of the total daily trade are:


Forex trading involves the simultaneous buying of one currency and selling another. The currencies involved in a single trade form a currency pair. The first currency quoted in a currency pair is called the base currency, while the second currency is called the quote currency or the counter currency. When an exchange rate is quoted, it is always expressed as the number of units of the counter currency needed to buy one unit of the base currency.

While there are several currency pairs, the top four currency pairs that account for 70% of the total daily trade are:

  • Euro/US Dollar – EUR/USD.
  • Great Britain Pound/ US Dollar – GBP/USD.
  • US Dollar/ Swiss Franc – USD/CHF.
  • US Dollar/ Japanese Yen – USD/JPY.

 

How Do Investors Trade in Currency Pairs?

Trading in currency pairs has gained popularity, with daily trades touching $3.8 trillion as of end-2007. The fluctuation in the exchange value of a currency pair offers significant profit making opportunities to investors. Investors wanting to trade in currency pairs can buy an ETF, such as the PowerShares DB U.S. Dollar Bullish Fund and DB G10 Currency Harvest Fund, which tracks a basket of different currencies. These ETFs trade on stock exchanges just like stocks. Alternatively, investors can directly buy foreign currency from a bank and hold it.

Here are the steps investors can take to trade in a currency pair:

  • Establish a forex account at a broker. This provides access to a trading platform on which an investor can open or close currency positions.
  • Select the currency pair in which you want to trade.
  • Once an order has been placed, you could either keep close vigil on the market prices or place stop orders.

 

Benefits of Trading Currency Pairs

Some of the benefits of trading currency pairs are:

  • This is a highly profitable alternative to the more common investment options, like purchasing stocks or bonds.
  • Since the forex market is open 24-hours a day, trading in currency pairs can be conducted at any time of the day.
  • The forex market is highly liquid.
  • One can benefit from high leverage offered by brokers.
  • Everyone in the forex market can easily access information necessary for making vital trade decisions at all times.
  • Currency pairs of unlimited value can be traded at a specific market price.
  • There is no bear market, since when one currency of the pair declines, the other one appreciates.

 

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