Beginner’s Guide to Currency Pairs Trading

Currency pairs form the foundation of forex trading, allowing traders to speculate on the value of one currency relative to another. Whether you’re new to forex or looking to deepen your understanding, this guide will walk you through the basics of currency trading, major and minor pairs, and how to start trading in the world’s largest financial market.

Key Points

• Currency pairs allow traders to speculate on the value of one currency compared to another in the forex market.
• Major currency pairs, like EUR/USD, offer high liquidity, making them ideal for beginners and experienced traders alike.
• Successful currency trading requires a solid understanding of market factors, strategic planning, and effective risk management.

What is Currency Trading?

Currency trading involves the buying and selling of currencies, where traders speculate on the movement of one currency’s value against another. In every forex trade, the first currency in the pair is known as the base currency, and the second is the quote currency. 

Traders either buy or sell the base currency, depending on whether they expect its value to rise or fall against the quoted currency.

What are Currency Pairs?

A currency pair is a combination of two different currencies which are valued against each other. This enables investors and traders to compare the value of one nation’s currency to another.

Trading currencies via pairs therefore involves two sides automatically – a buyer and a seller. The most commonly traded currency pairs are called the “majors” as they are the most liquid pairs, and all involve the US dollar on one side of the trade. 

Currency pairs can be traded in the global foreign exchange market, which is the biggest financial market in the world. Its average daily turnover hit $7.5 trillion per day in April 2022, according to the BIS Triennial Central bank Survey, which dwarfs the nearest markets ^[1].  

As there is no central market exchange, it is a market that never sleeps and is open 24 hours a day, five days a week. This is unlike stock or commodity markets which close at the end of each business day.

How to Read Currency Pairs

All currencies have a three-letter currency code. This normally consists of the first two letters representing the country and the third being the actual currency. For instance, USD is the US dollar, the euro is EUR and GBP is the Great British pound.

Let’s use EUR/USD as an example:

• The first currency is known as the base currency which is the Euro (EUR)
• The second currency in this pair (the USD) is known as the quote currency

A ‘position’ is the term used to describe a trade in progress. 

• A long position means a trader has bought one currency (the base) against selling another (the quote), expecting the first currency’s value to increase over the second. 
• A short position refers to a trader who sells a currency expecting it to decrease and plans to buy it back at a lower value.

Major Currency Pairs Explained ^[2]

Major currency pairs dominate the forex market due to their high liquidity and consistent trading volumes. These pairs involve the most stable and widely recognised currencies, making them a popular choice for both beginner and experienced traders.

What are the Major Currency Pairs?

Major currency pairs refer to the most frequently traded combinations in the forex market. These pairs all feature the US dollar (USD), which is widely regarded as the global reserve currency due to the size and stability of the US economy and its robust political framework. As a result, they account for a significant portion of global forex transactions.

Popular Major Currency Pairs You Can Trade [2]

The major currency pairs are the most commonly traded in the forex market, offering high liquidity and tight spreads. These pairs always include the US dollar paired with another leading global currency. 

Some of the most popular major pairs to trade include:

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

The Benefits of Trading Major Currency Pairs

Trading major currency pairs offers several key advantages, making them highly attractive to forex traders. One of the main benefits is their high liquidity, which ensures smoother transactions and tighter spreads, meaning lower trading costs. 

Additionally, because these pairs are linked to stable, well-established economies, price movements tend to be less volatile compared to exotic pairs, reducing the risk of unexpected sharp market fluctuations.

Minor and Exotic Currency Pairs Explained ^[3,4]

While major currency pairs dominate forex trading, there are other options available for traders looking to explore less common combinations. Minor and exotic currency pairs offer distinct opportunities and risks, with differences in liquidity, volatility, and spreads compared to major pairs.

What are the Minor Currency Pairs?

Minor currency pairs, also known as “crosses,” involve major global currencies but exclude the US dollar. These pairs are often less liquid than major pairs, which can result in wider spreads. 

Despite lower liquidity, minors are still actively traded and can present opportunities for profit, especially in markets influenced by regional or economic developments.

Examples of the Minor Currency Pairs

Some well-known minor currency pairs include:

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

What are the Exotic Currency Pairs?

Exotic currency pairs feature a combination of a major currency and a currency from an emerging or smaller economy. These pairs tend to have much lower liquidity compared to both majors and minors, which leads to significantly wider spreads. 

Exotic pairs are also more volatile, meaning traders should be prepared for rapid price fluctuations. However, this volatility can also present potential opportunities for traders willing to manage the associated risks.

Examples of the Exotic Currency Pairs

Some examples of exotic currency pairs include:

• USD/SGD (US Dollar/Singapore Dollar)
• USD/HKD (US Dollar/Hong Kong Dollar)
• EUR/TRY (Euro/Turkish Lira)
• GBP/ZAR (British Pound/South African Rand)

How Currency Pairs Work in Trading?

Each transaction involves the selling of one currency and the purchase of another. Currencies are traded in pairs with the aim of potential returns from the appreciation or depreciation of one currency over the other. 

Let’s say that you changed €1,000 into US dollars for a vacation and got $1,100. After the exchange rate changed from €1.10 to €1, instead of getting €1,000 back, you would receive €1,100. 

You have gained €100 from holding your money in dollars while the exchange rate changed – the euro has dropped in value, while the dollar has increased in that time.

This is essentially how you trade in the currency market. For example, if the currency pair EUR/USD was trading at:

Currency Pair	BASE (BID PRICE)	QUOTE (ASK PRICE)
EUR/USD	1.0916	1.0918

An investor looking to open a long position on the euro would purchase 1 EUR for 1.0918 USD. The first price is the bid price which is the price the buyer will pay for the currency. The ask price is the price they would be willing to sell it. 

The trader will then hold the euro in the hope that it will appreciate, selling it back to the market once the price has increased.

An investor going short on EUR would sell 1 EUR for 1.0916 USD. This trader expects the euro to depreciate and plans to buy it back at a lower rate if it does.

The difference between the bid price and ask price is called the spread. This is generally quoted in number of “pips” or the fourth decimal point out. In our example, the spread is two pips. 

How to Start Trading Currency Pairs?

If you’re ready to start trading currency pairs, here are a few steps to help you get started. These steps will guide you through the process and help you begin your forex trading journey.

1. Open a Live Currency Trading Account

The first step to get started in trading currency pairs is to open a live currency trading account with a reputable and trusted brokerage such as Vantage. Sign up for an account and unlock exclusive benefits, including our ‘Deposit Bonus‘ promotions and ‘Vantage Rewards’, which reward you for every trade you make.

Once you’ve completed the registration process, deposit funds into your account and access the trading platform. From there, you can begin placing trades on your chosen currency pairs.

2. Select Currency Pairs to Trade

Vantage offers more than 40 currency pairs, giving you a wide range of options to diversify your strategy and take advantage of different market conditions.

When selecting currency pairs, consider your goals and risk tolerance. Each pair comes with its own levels of liquidity, volatility, and spreads, so it’s important to choose pairs you’re familiar with and have researched thoroughly.

3. Analyse the Currency Markets and Monitor Your Position

Before placing any trades, it’s essential to analyse the currency markets. Leverage tools like news updates, economic indicators, and charts to assess market trends and predict how currencies may move. Once your position is open, continuously monitor the market to ensure your trade is progressing as expected and adjust your strategy if needed.

4. Close the Position to Finalise the Trade

Once you’ve monitored your trade and the market, the final step is to close your position. If the currency pair has moved as anticipated, you can close the trade and secure your potential profit. 

If the market has moved against you, consider closing the position to limit potential losses. To manage risk effectively, always make use of tools like stop-loss orders, which can automatically close your trade if the market shifts unfavourably.

Tips for Successful Currency Trading

Achieving success in currency trading requires a solid understanding of the market, strategic decision-making, and effective risk management. Here are some essential tips to help you build a strong foundation for your forex trading journey.

Understand What Moves the Currency Pairs

Currency pairs are influenced by a range of factors, including economic data, geopolitical events, and market sentiment. Key economic indicators, such as interest rates, inflation reports, and employment data, can have a significant impact on the strength or weakness of a currency. 

Central bank decisions, political developments, and even global crises can also cause currency fluctuations. By staying informed on these factors and regularly following market news, traders can better anticipate price movements and make more informed trading decisions.

Understand the Correlation of the Currency Pairs

Many currency pairs are interrelated, and understanding these correlations can be beneficial when formulating trading strategies. A positive correlation means that two pairs tend to move in the same direction, such as EUR/USD and GBP/USD, while a negative correlation indicates that two pairs often move in opposite directions, like USD/JPY and EUR/USD. Recognizing these correlations can help traders manage risk more effectively, diversify their portfolios, and avoid taking contradictory positions in the market.

Using Fundamental Analysis

Fundamental analysis involves examining a range of factors that influence a country’s economic performance, including economic, political, and social elements. These factors impact the supply and demand of goods and services, ultimately affecting currency value and asset prices. Key examples include central bank policies, geopolitical developments, environmental conditions, and company earnings reports—essentially, anything that can offer insights into the potential direction of the market.

Using Technical Analysis

Technical analysis focuses on studying price movements and chart patterns to uncover clues about underlying supply and demand levels. The goal is to identify historical trends and patterns that can guide traders on when to enter or exit a trade. While technical analysis isn’t an exact science and can be open to interpretation, with time and practice, traders can hone their skills and use it as a valuable tool for making informed trading decisions.

Useful Tools for Currency Trading

A range of tools can be used by traders to make trading decisions by gaining insights into market conditions and price movements. One of the most common tools is economic indicators, which provide data on key metrics such as inflation rates, employment figures, and GDP growth, offering a view of the economy’s overall health. 

Additionally, following economic news enables traders to act on real-time information, responding to significant events such as interest rate changes, geopolitical developments, and economic data releases. Staying updated on market-moving news through news trading helps traders make timely adjustments to their strategies, maximising potential gains or minimising losses based on the latest developments.

Risk Management in Currency Trading

Risk management is a critical component of any trading strategy, especially in the fast-moving forex market. One of the most effective ways to manage risk is by setting stop-loss orders, which automatically close a position if the market moves against you beyond a certain point, limiting potential losses. 

Another strategy is to use proper position sizing, ensuring that you don’t risk too much of your trading capital on a single trade. Diversifying your trades across different currency pairs can also help reduce exposure to any one market’s volatility. Effective risk management not only protects your capital but also allows you to trade with greater confidence and consistency.

Frequently Asked Questions

What are the Top Currency Trading Platforms? [New]

There are several highly regarded platforms for currency trading, each offering a range of features to suit different trading styles. Some of the top platforms include MetaTrader 4 (MT4) and MetaTrader 5 (MT5), known for their advanced charting tools, technical indicators, and automated trading capabilities.

Vantage, for instance, offers access to both MT4 and MT5, as well as its own proprietary platform, providing flexibility and choice for traders.

What is the Most Liquid Currency Pair?

The EUR/USD (Euro/US Dollar) is the most liquid currency pair in the forex market ^[5]. As it involves two of the world’s largest economies, the eurozone and the United States, the EUR/USD pair is traded heavily, ensuring high liquidity and tight spreads. 

Its liquidity makes it popular among traders of all levels, from beginners to professionals, as it tends to have lower volatility and predictable price movements.

How to Find the Best Currency Pairs to Trade?

Finding the best currency pairs to trade depends on several factors, including your trading strategy, risk tolerance, and market knowledge. Major pairs, such as EUR/USD, GBP/USD, and USD/JPY, are popular due to their high liquidity and tighter spreads, making them ideal for most traders. 

However, minor and exotic pairs can also offer opportunities if you’re seeking higher volatility and potentially larger returns. To choose the best pairs, it’s essential to conduct thorough research, understand current market conditions, and perform both fundamental and technical analysis, while utilising tools such as economic indicators and chart patterns to guide your decisions.

Final Thoughts

Currency pairs allow traders to enter and exit the world of foreign exchange trading. 

Vantage Markets provides you with advanced trading software for free. This enables you to access currency pairs and trade the “market that never sleeps”. Further education, webinars and trading tools are available to help you improve your knowledge and expertise. Get all the latest market news and analysis on the Vantage website to keep yourself updated.

Open a live account with Vantage and start your trading journey now!

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