💱 Understanding Currency Pairs
Currency pairs are the foundation of forex trading. Understanding different pair types, their characteristics, and when to trade them is essential for success.
What is a Currency Pair?
A currency pair shows the exchange rate between two currencies. The first currency is the base currency, the second is the quote currency.
Example: EUR/USD = 1.1050
- EUR: Base currency (Euro)
- USD: Quote currency (US Dollar)
- 1.1050: 1 Euro = 1.1050 US Dollars
How to Read Currency Pairs
Buying EUR/USD:
- You're buying EUR (base currency)
- You're selling USD (quote currency)
- You profit if EUR strengthens against USD
Selling EUR/USD:
- You're selling EUR (base currency)
- You're buying USD (quote currency)
- You profit if EUR weakens against USD
Types of Currency Pairs
1. Major Pairs
Definition: Pairs that include USD and are most liquid.
The 7 Major Pairs:
- EUR/USD (Euro/US Dollar) - Most traded
- GBP/USD (British Pound/US Dollar) - "Cable"
- USD/JPY (US Dollar/Japanese Yen) - Most liquid Asian pair
- USD/CHF (US Dollar/Swiss Franc) - "Swissie"
- AUD/USD (Australian Dollar/US Dollar) - "Aussie"
- USD/CAD (US Dollar/Canadian Dollar) - "Loonie"
- NZD/USD (New Zealand Dollar/US Dollar) - "Kiwi"
Characteristics:
- Spreads: Tightest (0.5-2 pips)
- Liquidity: Highest
- Volatility: Medium to High
- Best For: All trading styles
2. Minor Pairs (Crosses)
Definition: Pairs that don't include USD.
Popular Minor Pairs:
- EUR/GBP (Euro/British Pound)
- EUR/JPY (Euro/Japanese Yen)
- GBP/JPY (British Pound/Japanese Yen)
- AUD/JPY (Australian Dollar/Japanese Yen)
- EUR/AUD (Euro/Australian Dollar)
- GBP/AUD (British Pound/Australian Dollar)
Characteristics:
- Spreads: Wider than majors (2-5 pips)
- Liquidity: Good
- Volatility: Medium to High
- Best For: Day trading, swing trading
3. Exotic Pairs
Definition: Pairs that include a major currency and an emerging market currency.
Examples:
- USD/TRY (US Dollar/Turkish Lira)
- USD/ZAR (US Dollar/South African Rand)
- USD/MXN (US Dollar/Mexican Peso)
- EUR/TRY (Euro/Turkish Lira)
- GBP/ZAR (British Pound/South African Rand)
Characteristics:
- Spreads: Widest (10-50+ pips)
- Liquidity: Low
- Volatility: Very High (unpredictable)
- Best For: Experienced traders only
⚠️ Warning: Exotic pairs are risky. Wide spreads and low liquidity make them difficult to trade.
Best Currency Pairs by Trading Style
Scalping
Best Pairs:
- EUR/USD: Tightest spreads, highest liquidity
- GBP/USD: Good volatility, tight spreads
- USD/JPY: Liquid, predictable moves
Why: Need tight spreads (under 1 pip) and high liquidity for quick entries/exits.
Day Trading
Best Pairs:
- EUR/USD: Most liquid, clear trends
- GBP/USD: High volatility, good moves
- USD/JPY: Trend-following characteristics
- AUD/USD: Commodity-linked, clear trends
Why: Need volatility for daily moves, but not too volatile.
Swing Trading
Best Pairs:
- All Major Pairs: EUR/USD, GBP/USD, USD/JPY, AUD/USD
- Minor Pairs: EUR/GBP, EUR/JPY, GBP/JPY
Why: Can hold for days, spreads matter less. Focus on clear trends.
Position Trading
Best Pairs:
- Major Pairs: All majors work
- Commodity Pairs: AUD/USD, NZD/USD, USD/CAD
Why: Hold for weeks/months. Fundamental analysis important.
Currency Pair Characteristics
EUR/USD (Euro/US Dollar)
Nickname: "Fiber"
Characteristics:
- Most Traded: Highest volume worldwide
- Spreads: Tightest (0.5-1 pip)
- Volatility: Medium
- Best Sessions: London, New York
- Correlation: Inverse to USD/CHF
Trading Tips:
- Best for beginners (most liquid)
- Clear trends on daily charts
- Watch ECB and Fed policy
GBP/USD (British Pound/US Dollar)
Nickname: "Cable"
Characteristics:
- Volatility: High (can move 100+ pips daily)
- Spreads: Tight (1-2 pips)
- Best Sessions: London, New York
- Correlation: Strong with EUR/USD
Trading Tips:
- High volatility = high risk
- Watch BoE policy and Brexit news
- Good for day trading and swing trading
USD/JPY (US Dollar/Japanese Yen)
Nickname: "Gopher"
Characteristics:
- Volatility: Medium to High
- Spreads: Tight (1-2 pips)
- Best Sessions: Tokyo, New York
- Correlation: Inverse to Gold (often)
Trading Tips:
- Strong trend-following characteristics
- Watch BoJ policy and US interest rates
- Good for carry trades (when USD rate higher)
AUD/USD (Australian Dollar/US Dollar)
Nickname: "Aussie"
Characteristics:
- Volatility: Medium to High
- Spreads: Moderate (1-3 pips)
- Correlation: Strong with Gold, Commodities
- Best Sessions: Sydney, Tokyo, New York
Trading Tips:
- Commodity-linked (watch gold, iron ore prices)
- Watch RBA policy and China economy
- Good for swing trading
USD/CAD (US Dollar/Canadian Dollar)
Nickname: "Loonie"
Characteristics:
- Volatility: Medium
- Spreads: Moderate (1-3 pips)
- Correlation: Strong with Oil prices
- Best Sessions: New York
Trading Tips:
- Oil-linked (CAD strengthens when oil rises)
- Watch Bank of Canada policy
- Good for day trading and swing trading
Currency Pair Correlations
Understanding Correlations
Positive Correlation: Pairs move in same direction Negative Correlation: Pairs move in opposite directions
Important Correlations
EUR/USD vs USD/CHF:
- Correlation: -0.90 (strong negative)
- Why: Both European currencies, move opposite to USD
GBP/USD vs EUR/USD:
- Correlation: +0.70 (moderate positive)
- Why: Both European currencies, similar fundamentals
AUD/USD vs Gold:
- Correlation: +0.80 (strong positive)
- Why: Australia is major gold producer
USD/CAD vs Oil:
- Correlation: -0.70 (strong negative)
- Why: Canada is major oil exporter
Trading with Correlations
Diversification:
- Don't trade highly correlated pairs (same exposure)
- Example: Don't trade both EUR/USD and USD/CHF (they move opposite)
Confirmation:
- Use correlated pairs to confirm signals
- Example: If EUR/USD breaks up, check USD/CHF (should break down)
Best Times to Trade Each Pair
EUR/USD
- Best: London session (8:00 AM - 12:00 PM GMT)
- Good: New York session (1:00 PM - 5:00 PM GMT)
- Avoid: Asian session (low volatility)
GBP/USD
- Best: London session (8:00 AM - 12:00 PM GMT)
- Good: London-New York overlap (1:00 PM - 4:00 PM GMT)
- Avoid: Asian session
USD/JPY
- Best: Tokyo session (12:00 AM - 9:00 AM GMT)
- Good: New York session (1:00 PM - 5:00 PM GMT)
- Avoid: European lunch (12:00 PM - 1:00 PM GMT)
AUD/USD
- Best: Sydney session (10:00 PM - 7:00 AM GMT)
- Good: Tokyo session (12:00 AM - 9:00 AM GMT)
- Avoid: European session (low activity)
Currency Pair Selection Checklist
Before choosing a pair to trade:
- [ ] Checked spread (tight enough for your strategy?)
- [ ] Reviewed volatility (matches your risk tolerance?)
- [ ] Confirmed liquidity (high enough for your position size?)
- [ ] Checked economic calendar (no major news?)
- [ ] Reviewed correlation (not overexposed?)
- [ ] Matched to trading style (scalping vs swing?)
- [ ] Understood fundamentals (interest rates, economy?)
Common Currency Pair Mistakes
- Trading Exotic Pairs: Too risky for beginners
- Ignoring Spreads: Wide spreads eat profits
- Overexposure: Trading highly correlated pairs
- Wrong Session: Trading EUR/USD during Asian session
- Ignoring Fundamentals: Not understanding pair drivers
Summary
Understanding currency pairs is fundamental to forex trading. Choose pairs that match your trading style, risk tolerance, and market knowledge.
Key Takeaways:
- Major pairs (EUR/USD, GBP/USD, USD/JPY) are best for beginners
- Exotic pairs are risky (wide spreads, low liquidity)
- Match pairs to your trading style (scalping vs swing)
- Understand correlations to avoid overexposure
- Trade pairs during their most active sessions