Forex is the global, over-the-counter currency market. Unpredictable as it is, FX is also a decentralized market, governed by no centralized body. Global traders buy and sell currencies based on speculation and predictions, in this absolutely volatile market. Since FX is all about trading in global currencies, in pairs, understanding currency pairing is the crux of this market. Currency pairing is defined as the relationship that two currencies have, in terms of their worth. A paring is denoted as a base and a quote, which is basically the way two currencies are written about: like EUR/USD 1: 25. In this pairing, the EURO is the base currency and USD is the counter currency. A trader will buy EURO and sell USD, as he is betting on EURO outshining USD. This also means that 1 EURO is worth 1:25 USD. This relationship status is dependent on the banks, which keep on adjusting their transactions on daily basis.
Base/currency Or Bid/ ASK
In the FX market, when we say we buy and sell currencies, it just means that we buy the base currency and sell the counter or the secondary currency. The hope is that the base currency appreciates in value. This is when we go long on a currency pair. In the example of EUR/ USD, we buy the EURO and sell USD. However, when we go short or when we are day trading, the equation flips. Here the terms used for a pair change to Bid and Ask. EUR/USD would be Bid/Ask respectively, here. When we go short, we will buy USD, the bid and sell the EURO, the Ask. When we go short, we buy the quote and sell the base and the terms for the same changes to Bid and ask.
Kishore M, Dubai based FX expert reviews this aspect of trading,” The logic behind buying and selling currencies is: We bet one currency against another. The hope is that the currency we are buying will get stronger or will appreciate as against the one we are selling. When this happens, we make profits”.
Yet after years of trading, if asked to pick a pair, which is the most tradable and profitable, even a seasoned trader would hesitate to pick a particular pair, off hand. FX market is volatile. The valuation of the currencies fluctuates, depending on a lot of factors. It could be economic, geopolitical or even a natural catastrophe, which affects an economy, thereby influencing its currency valuation too.
Popular Currencies pairs
However, there are some pairs which dominate the market. EURO/USD is one of the pairs in which almost 25% of the transactions occur. Kishore M says that “This is due to the size of the US economy, the volume of economic activities of the country and the fact that since most of the countries are either importing or exporting to the US. This consequently leads USD to become the most used and sought after currency, internationally”.
Here are two interesting terms used by the traders in FX. Every currency paring with the USD is called the Major. All the other currency pairings, without the USD, are called the crosses.
The most popular Major currency pairs in the FX market are:
Crosses are an interesting lot too. They give more opportunities to make profits, away from the Majors. Some of the popular crosses are:
The FX market needs constant monitoring and following to keep on betting on the right currency pairings. This is due to the fact that exchange rates in the FX market change within a matter of minutes. This basically means that you are either making a good profit or a loss. There are a few scenarios that lead to the exchange rate fluctuation.
One of the driving forces is the need to take advantage of interest rates. If a trader has a deposit in his bank in the US which gives him an interest rate of 3%, he will be okay with this till he realizes that a friend of his with the same money worth of EURO is earning a profit of 4.5% in his bank. This will push the trader to bet on EURO as against USD, in an attempt to buy his worth of EURO to earn a much higher interest rate. This is attempted by traders on an everyday basis, which ends up fluctuating the FX market.
The same, when followed by multibillion-dollar companies, send the FX market into a frenzy. For instance : Imagine that a multibillion-dollar company has a reserve of USD in millions. With the taxation period nearing, that company needs to convert the USD into its own country’s currency. In this case, that company sells the USD in the FX market, at one go. With this oversupply of USD, the valuation of the US dollar comes spiralling down. On the other hand, the company would be looking at buying back its own currencies too. Whatever currency it wants to buy back, will spike as the buyer is willing to buy a particular currency at any cost. This will affect the exchange rate in a huge way for that day in the FX market.
FX market : Tradable currency pairs and influencers
Base/currency Or Bid/ ASK
Popular Currencies pairs
FX trading is unpredictable. Understanding currency pairing is a must. The rule is not to invest in one pair only. look for options and do not ignore the crosses.